Law & Business | Professor Bainbridge

Legislate in Haste, Repent at Leisure

The text of my May 2006 speech to the Hoover Institute on Sarbanes Oxley, Legislate in Haste, Repent at Leisure is now available online. The NCPA's Daily Policy Digest summarizes as follows:

Sarbanes-Oxley (SOX) legislation is costing businesses more than anybody anticipated, putting many at risk, and forcing some to go private, or worse, go broke, says Stephen Bainbridge, William D. Warren Professor of Law at the University of California, Los Angeles.

For example:

According to the Wall Street Journal, publicly traded companies routinely report that their audit costs have gone up as much as 30 percent, or even more, as a result of the tougher audit and accounting standards imposed by SOX.

Just paying the fees now required to fund the Public Company Accounting Oversight Board can run as much as $2 million for the largest firms.

Corporate law firm Foley & Lardner, for example, found that senior managers of public middle-market companies expect costs to increase by almost 100 percent as a result of SOX.

The most costly part appears to be Section 404, which requires inclusion of internal control disclosures, says Bainbridge:

The Securities and Exchange Commission initially estimated that Section 404 would require only 383 staff hours per company per year.

But according to a Financial Executives International survey, projected expenditures of staff hours reach 35,000 -- almost 100 times the SEC's estimate.

In addition, the survey estimates that firms will spend $1.3 million on external consultants and software, and an extra $1.5 million in audit fees -- a jump of 35 percent.

The most troubling aspect is that the costs are disproportionately borne by smaller public firms. For many of these, the additional cost is a significant percentage of their annual revenues. Some have chosen to go private. But for those who stay public and are operating on thin margins, SOX compliance costs can make the difference between profitability and losing money, says Bainbridge.

Posted on Tuesday, December 26 2006 | Permalink

Beyond irony is that Enron, whose tragic collapse helped triggered the mania for these �reforms,� for several years had already included an expensive audit by Andersen of its internal controls, hardly the rational actions of a company supposedly engaged in a massive criminal conspiracy. (It had also already separated the office of chairman of the board and CEO and had plenty of independence directors.) Perhaps most ironic, the powerful internal control provided by the huge, and audited ,Risk Assessment and Control Department, whose job was to second guess business decisions throughout the company, provided much of the grist for the DOJ and others to come in later with its bogus claims of the fraudulent disclosure. A tragic fall, followed by a tragic legislative reaction and DOJ witch-hunt.

Posted by on 12/26 at 10:35 PM

It’s not the legislation in haste, but not implemented in its true spirit, and is commercialised by the vested interests of the accounting firm.

It’s very simple law which, basically prescribe for corporate governance, and not running the public corporation as per fancies of a few. It emphasizes for governance by risk controls, which 99% corporation already had in place. It calls for collaborative governance by all the process owners, and does not ask for isolated complaince efforts.

With GDP of 600 Trillion Dollars and a fraud rate of 6%, if the efforts could bring down the rate of fraud even marginally, one can imangine the savings.

The implementation and poor guidance not the law to be blamed.

Posted by on 12/27 at 01:03 PM

The problem is what came before the law, not what came after. It’s the shotgun approach to perceived problems (SOX has 52, largely unrelated provisions), the false premises behind that perception, the punitive intent arising from that perception, and the putative intent foiled by unintended consequences.

SOX is bad law.

Posted by M. Hodak on 12/29 at 10:07 PM

The orgy of unethical and/or illegal activity in corporate America continues largely unabated.

So let’s make this trade:

1) repeal SarbOx
2) get the DOJ off their dead butts
3) have the SEC appoint directors to PUBLIC companies

just a thought, happy New Year

Posted by on 12/31 at 09:54 AM

Why the hell would the SEC do a better job than shareholders? Although somewhat indirect, the shareholders have something to gain and something to lose. The SEC has neither. Putting the current system, warts and all, against a mythic infallible government agency is neither fair nor remotely in accordance with reality.

- Josh

Posted by Wild Pegasus on 01/01 at 09:31 PM

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