Wednesday, June 21, 2006

Sarbanes-Oxley is an unhealthy export

Sarbanes-Oxley, overwhelmingly adopted by Congress in 2002, demonstrates the point. All the misconduct at Enron, WorldCom and their like was already illegal under existing laws. Indeed, every successful criminal prosecution of corporate officers to date has been based on pre-Sox laws and rules. The one prosecution based on Sox - involving Richard Scrushy of HealthSouth - failed. Nonetheless, US leaders needed to signal unambiguously that this conduct would not be tolerated. Sox was hastily and badly drafted, but it promotes several useful ideas. Not least of these are the creation of the Public Company Accounting Oversight Board, the need for companies to maintain and evaluate their internal controls and a two-business-day reporting requirement that would have limited much of the current scandal involving stock option grant backdating.

The problems with Sox, however, are far more serious than reflected by Congress's overwhelming enactment. Its "one-size-fits-all" approach to regulation stifles innovation, creativity, risk-taking and competitiveness. Worse, Congress's exportation of Sox's standards has created huge difficulties for multinational companies and produced scorn for US standards. This embodiment of American geocentrism has resulted in a loss of foreign listings on US exchanges and diversion of initial public offerings to non-US locales.

Sarbanes-Oxley is an unhealthy export

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