Wednesday, February 09, 2005

Congress Chases Away Business Again

There is an op-ed in today's Wall Street Journal by a US securities lawyer working in London about how the Sarbanes-Oxley Act has pushed several European companies to begin the long process of delisting their securities from American markets. Link. (subscription required)
The rush to delist and deregister is, in the first instance, about money: Being a U.S. reporting company is about to get a whole lot more expensive. This is because of Section 404 of the Sarbanes-Oxley Act, which requires reporting companies to produce a detailed assessment of their internal control regime, together with an auditors' attestation report on that assessment. For non-U.S. companies, this requirement is currently due to come into force for financial years ending after July 15, 2005. The Section 404 attestation report looks to be phenomenally costly. ITV, for example, has claimed that if it succeeds in deregistering it will save £4 million this year and £3 million annually thereafter. A significant chunk of this can be traced to Section 404 compliance.

The Act itself was totally unnecessary. All the laws we needed to deal with corporate wrongdoing were already on the books. What we needed was enforcement, and we were finally getting that by the time Sarbanes-Oxley passed.

We now know that the illegalities at Enron, Worldcom and Adelphia took place primarily on the Clinton watch. The only interest that administration took in corporate leadership was in fundraising and in selling nights in the Lincoln Bedroom. The Bush Administration came into office believing in the private sector, and than meant they understood the need for legal and ethical corporate management. The scandals that pushed Congress to "do something" had been uncovered under the Bush Administration, whose Justice Department had already begun the necessary legal proceedings. With Congress feeling the need to "do something" but nothing needing to be done beyond what the Administration was doing, Congress did what it does best. It passed a law that did nothing to solve the apparent problem, but required business to spend, in the aggregate, billions of dollars.

Now we are beginning to see some of the unintended consequences. Sarbanes-Oxley should be repealed. Unfortunately, what is going to happen as it becomes more and more obvious that its negative consequences far exceed whatever positives may be found, Congress will merely re-double it.


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