Tuesday, June 13, 2006

Smash the Sarbanes-Oxley law

The most significant NYSE-Euronext asset may be helping companies shift more easily among national exchanges to escape regulations that impose more costs than benefits on investors.

Consider the Sarbanes-Oxley Act of 2002. Enacted in the wake of the Enron-era accounting scandals, it requires new, tougher controls for virtually every activity affecting a publicly traded company's financial statements.

While improvements in the reliability of financial statements and transparency were welcome, some Sarbanes-Oxley requirements are too burdensome. For example, compelling businesses to undertake both internal and external audits of financial controls, and requiring auditors to focus on virtually every transaction and asset, instead of just the ones that truly affect the bottom line, are too expensive for small and medium-sized firms.

Requiring chief executive and chief financial officers of large, complex enterprises to sign off on all the details of audits and financial statements, coupled with stiff fines and 20-year prison terms, is onerous and an invitation to simple tyranny. The recent convictions of Enron executives Ken Lay and Jeffrey Skilling demonstrate that the laws in place before Sarbanes-Oxley were adequate to bring wrongdoers to justice.

It should surprise few that this law is causing capital flight. More U.S. companies are staying or going private to avoid the law, and capital markets are becoming bifurcated and less democratic. The private market is open to the big, rich institutions that may evaluate companies without the benefit of Securities and Exchange Commission disclosure, while small investors are essentially shut out of shares of businesses that would be publicly traded if not for Sarbanes-Oxley.

Smash the Sarbanes-Oxley law

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