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Sarbanes-Oxley: Costs, Costs, Costs

September 26, 2007

Tags Financial MarketsMoney and Banking

David Weild, former vice chairman and executive vice president of The NASDAQ Stock Market, speaks out on SOX. He makes some sober remarks, but at the same time he walks on coals, unwilling to admit that Sarbanes-Oxley (SOX) was wrong, evil, and ill-intentioned from the start. He states that in his discussions with Silicon Valley CFOs and venture capitalists, "People are simply fed up with being held hostage by the accounting profession and the big accounting firms are clearly hurting the process of going public."

Weild believes that SOX is undermining US business competitiveness because the feedback he received from financial people working in the trenches have complained that SOX:

1) has enabled public accounting firms to produce a lower level of service at far greater costs

2) has public accounting firms burdening companies with bureaucratic nightmares, delays, restatements, and financial reporting disagreements

Weild weakly suggests that "I can't believe that this is where Congress and the SEC intend us to be," though that is essentially a statement that absolves the wrongdoers of any purposeful wrongdoing. He goes on to imply that the problems burdening smaller companies that wish to go public were unintended consequences of trying to contain the bigger horses within the gate. That's a cop-out, at best.He concludes:

I do think that Chairman Cox has done an exceptional job and I recognize fully that the above-referenced problem was not of his making. For all the good that Sarbanes-Oxley did, it was clearly drafted and passed in haste in response to the political and media climate at the time. Not unexpectedly, there have been "unforeseen consequences" and while I understand that the SEC has focused some attention on lessening the burden of Sarbanes-Oxley compliance on small capitalization stocks, I think it is time to focus attention and to hold hearings on how the current practice of accounting has harmed the IPO market in the United States.

As a Wall Street insider, it is no wonder that Weild treads lightly. Sarbanes-Oxley has not been good. It has indeed made companies probe, test, and improve the operating effectiveness of their internal controls. But at what cost? Besides the direct monetary costs there is the qualitative costs as a result of another gigantic regulatory system being foisted upon private businesses involuntarily.

But don't blame public accounting firms for being too bureaucratic. Fact is, auditing is somewhat a fundamentally futile science. It is difficult and highly subjective. Auditors, especially in a SOX auditing role, deal with:

1) Highly prescriptive rules and judgmental aspects thereof

2) Conflicting oversight bodies (The Public Company Accounting Oversight Board tells auditors to do one thing, and the SEC tells firms to do another thing. At the end of the SOX audit, the two sets of "rules" must be reconciled and everyone needs to be happy.)

3) Huge companies with multiple divisions and multiple lines of businesses whose financial processes must be understood, documented, tested, and then an opinion is rendered as to the operating effectiveness of the company's internal controls

I can tell you that the public accounting firm partner at the top of the food chain on an audit - especially an audit involving a very large corporation - is aged beyond his years and does not get a whole lot of sleep at night. Imagine being the guy that has to sign the letter rendering the opinions regarding management's assessment of internal controls and the operating effectiveness of the company's internal controls. (Though, to be fair, recent updates to SOX 404 eliminates the need for the auditor to render an opinion on management's assessment of the operating effectiveness of its controls. This will negate some work, and additionally, will eliminate some costs.)

For SOX, the blame should be placed upon Mr. Sarbanes and Mr. Oxley, along with the assorted lobbyists, regulators, and political hacks that contributed to this nightmare. A lot of folks - including Mr. Oxley - launched stellar careers on the basis of their SOX notoriety. Mr. Oxley now earns up to $30k per speaking appearance. Sure the accounting firms and accountants - for the most part - love the regulatory state and are basking in the extraordinary fees that SOX brings forth, but generally, the guys doing the grunt work and signing away their professional reputation are putting much at stake in order to earn their paychecks.

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