Man Without Qualities

Tuesday, April 19, 2005

Legislate In Haste And Hysteria, Repent At Leisure

From the Wall Street Journal:

[W]e already know is that [Sarbanes Oxley (Sox)] is more burdensome than its critics imagined. The most notorious part of the law is Section 404... Section 404 demands that companies demonstrate that their "internal controls" -- from computer facilities to their chain of command -- are sound enough to prevent fraud. ... Section 404 makes no distinction between internal controls that matter and those that don't. ... Worst of all, 404 forces companies to re-document their efforts every year, regardless of circumstances. No surprise, then, that the number of companies missing financial filing deadlines has at least doubled compared with a year ago. ... One conservative estimate puts the national 404 tab at $35 billion, or some 20 times what the SEC predicted. ... The American Electronics Association estimates that while Section 404 costs the average multibillion-dollar company about 0.05% of revenue, the figure can approach 3% for small companies.

One result is that many companies are rethinking their decision to tap the public equity markets -- 21% of all those surveyed in a 2004 Foley and Lardner study. Foreign companies are threatening to delist from U.S. stock exchanges...

The greatest Sox irony is that its main beneficiaries are the same big accounting firms. ... The feds killed Arthur Andersen... but its offending partners simply scooted to one of the other firms and are laughing all the way to their new vacation homes. The tort bar also stands to gain ... securities lawsuits seeking class-action status was up 16% in 2004 ... Internal controls accounted for only 8% of fraud detection, or less than half of the 18% detected "by accident."

The larger issue here is balancing shareholder confidence against the business risk-taking that creates jobs and wealth. ... Turnover among Fortune 500 chief financial officers -- who may incur steep fines and even criminal penalties if even the slightest thing goes wrong -- was up 23% in 2004, a sign that the smartest executives may realize they don't need the Sox hassle. ...

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