• 26 Aug 2008 at 2:31 PM
  • SOX

Short Sarbanes-Oxley’s Accounting Board

A federal appeals court, in a 2-1 split decision announced Friday, held that the accounting oversight board created in 2002 as part of the Sarbanes-Oxley reforms is constitutionally permitted. The decision has been described as a victory for supporters of Sarbanes-Oxley and the Public Company Accounting Oversight Board. But it may in fact be its last gasp.
“Our bet is that federal high court can, in its wisdom, be counted on to reverse,” the editorial writers at the New York Sun write. “We give it a year before the Nine tell American businesses that they are free to produce a little more and audit a little less.”
After the jump, we explain why the Sun is probably right.

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What Good Is Sarbanes-Oxley Anyway?

Larry Ribstein, who writes on Ideoblog, asks:
Is there potential [Sarbanes-Oxley] internal controls liability for Bear executives? If not, and melt-downs like this can happen after SOX (worth $80+/share one day, $2 the next), then what was it, exactly, that SOX did for us? Could it be that SOX didn’t eliminate risk after all? … So two possible lessons from Bear: We didn’t need SOX, and it didn’t do any good.
Lessons from Bear on SOX [Ideoblog]

  • 05 Feb 2008 at 9:19 AM
  • SOX

The Death Of The Annual Report

We can’t remember the last time we saw a glossy, informative corporate annual report. These days most seem to be just 10K wraps–SEC filings with a glossy cover–and we read the data on our computer monitors. So who killed the annual report? Sarbanes-Oxley. [READ MORE]

Annual Report, R.I.P.
[The American]

SarbanesOxleyCosts.jpgWe’re generally fans of the Wall Street Journal opinion page. But yesterday the page ran an exceptionally unconvincing pair of articles—one by First Trust economist Brian Westbury alleging that business coverage was unduly bearish and the other by former Goldman Sachs partner Thomas Healey arguing that Sarbanes Oxley is an amazing success.
Let’s start with Healey’s piece on Sarbanes Oxley. The first thing indicator that something is wrong with Healey’s argument is the hyperbolic language he uses. “The last five years have made it irrefutably clear. Sarbanes-Oxley (Sarbox) is a textbook case of how regulation should ideally work in a democracy,” Healey writes. Lots of over-confidence there. Irrefutably clear? It’s like he’s surprised we’re even debating Sarbanes Oxley. And all that talk about democracy is just jingoistic smoke. You can almost sense the message: if you oppose Sarbanes Oxley you’re against democracy. Anti-american, even.
And that’s just when he’s getting started. By the time he’s done he’s really gone over the edge. “As Sarbanes-Oxley prepares to mark its fifth anniversary, there’s only one valid conclusion to draw. This milestone in responsible corporate governance and accountability has more than fulfilled its mission to the public,” he writes. Get that Sarbanes Oxley critics? Your conclusions are invalid! Invalid! Invalid!
We almost feel gross reading this kind of thing. It’s like a guy who keeps telling you his girlfriend is really, really hot. You want to give him points for his dedication and enthusiasm but at some point you start suspecting she’s a minger.
The space between Irrefutable and Invalid were filled up with arguments in favor of Sarbane Oxley that struck us as surprisingly weak. We came away thinking: Is this really the best the supporters of Sarbanes Oxley can offer? This Healy guy is a former Goldman partner, Reagan treasury official and a senior fellow at Harvard’s Kennedy school. But look what he comes up with:
“A powerful argument for Sarbox can be made simply by examining the performance of financial markets since the landmark act was passed.” This is worse than just an ordinary post-hoc, ergo-hoc fallacy. It only seems plausible if you concentrate on what is easy to see—a five year bull market—and ignore how well the economy might have performed without the economic drag of the regulation. Sure Sarbanes Oxley didn’t cause a five year bear market—but that’s like saying that just because a victim survived, you shouldn’t charge the guy who stabbed him with the crime. It’s an argument but it’s not quite as powerful as Healey imagines.
”Considerable attention has been given to the fact that U.S. companies spent an estimated $6 billion in 2006 complying with the provisions of Sarbox…That’s not an insignificant expense, but critics should weigh this against another incontrovertible fact: The cost of compliance pales in comparison to the $60 billion stockholders lost on Enron alone.” Let’s use some more Latin: this is a non-sequitur. There’s no convincing evidence that Sarbanes Oxley could have prevented the collapse of Enron or warned investors in time to get earlier. Without such evidence, counting Enron’s $60 billion on the ledger for Sarbanes Oxley makes no sense. What’s more, that $6 billion is just the direct cost of complying with Section 404 and doesn’t count many of the indirect costs of the regulation. So we’re dealing with imaginary benefits and under-counted costs.
“Finally, there’s the oft-heard charge that Sarbox is an insidious threat to the U.S. financial markets. How else to explain the fact the U.S. has been steadily losing IPOs to other countries? The facts tell a different story. Truth is, the U.S. continues to be the world’s leading financial market, commanding 45% of global mutual fund assets and 70% of global hedge funds.” This is more “the victim survived” sleight-of-hand. Look at this good thing, and ignore the costs.
Healey’s case for Sarbanes Oxley is so weak we’re tempted toward the conspiratorial notion that maybe he’s secretly an opponent who is attempting to undermine the regulations by marshalling super-bad arguments for them. A double agent of some sort. After all, if the arguments in favor of Sarbanes Oxley were really this bad, it would be on the fast-track to repeal, right?
Well, it would be if we lived in a democracy where regulation worked “ideally.” But we’re stuck with the one we got.
Sarbox Was the Right Medicine [Wall Street Journal]

Black SOX Scandal?

We like Alan Murray—and not just because he was so easy to beat up on when we were up against him on Squawk Box. He’s a smart guy but he’s a bit too credulous sometimes. And he constantly trips himself up on the grand illusion of our time—that moral problems can be solved by technical means. To cure a problem such as corporate fraud, all that is needed is a set of cleverly designed regulations. It is apparently very easy for the intelligent to forget that not all problems can be solved by the application of intelligence, even Alan Murray’s intelligence.
In the video above—and in his column on page 11 of today’s Wall Street Journal—you can hear him quickly jump from describing the Tom Wolfe-ian character of Conrad Black to the conclusion that we should be cautious about reforming or repealing Sarbanes-Oxley because, you know, it’s supposed to make doing bad things harder.
Larry Ribstein isn’t so sure. First of all, he wonders, what evidence is there that Sarbanes-Oxley really would do much to prevent the kind of intentional wrong-doing alleged in the Black case? “Indeed, it’s unclear that SOX would have prevented even Enron, which had a completely independent audit committee,” Ribstein writes.
But the real problem with Murray’s argument is even worse—like so many of the arguments for regulations that stem from anecdotal tales of wrong-doing, it fails to even attempt a basic cost-benefit test.
As Ribstein writes:

…even accepting Murray’s conclusion, this is not an excuse for SOX. Is it really worth huge costs to thousands of legitimate companies to (possibly!) prevent one Conrad Black? Do we really need a massive federal law to “mak[e] it clear that directors work for shareholders, not management.” In firms where directors and managers don’t already know this despite an already large structure of federal and state criminal and civil remedies and regulation, is SOX 404 really going to make a difference?

Black Trial Revives Bad Old Days
[Wall Street Journal]
Did Black need SOX? [Ideoblog]

  • 13 Mar 2007 at 11:39 AM
  • CNBC

What Sarbanes-Oxley Cost Warren Buffet

warrenbuffettbirthday.jpgYou know sometimes you walk into a restaurant and you see a couple of people you know. You stroll by the table to say hello and immediately you get that feeling—the one that tells you that you are interrupting something. Something intimate. This isn’t just a dinner. Not just friends out for drinks. This is a date. You are making it awkward.
That’s how we felt when we recently ran into a certain CNBC personality and a well-known financial type. No. Not that one. We’re talking about Liz Claman and Warren Buffett, who we ran into chatting on CNBC as we passed the television on the way to where we keep the whiskey. (Sure it’s only 11 am but we’ve got one of those phantom hangovers where we feel like crap despite only drinking half a bottle of red last night. Hair of the dog that bit us in our dreams.) Those two are mighty close these days.
What was the point of all this? Oh, right. Grandpa Buffett let loose with an interesting figure this morning. According to Buffett, Berkshire-Hathaway spent $24 million on auditing this year, a figure he says would have been closer to $10 million without Sarbanes-Oxley. This is just one, anecdotal data point but still. That’s an enormous cost multiplyer. If SarbOx is costing anything like this with many other companies, we’re looking at a serious wealth transfer because of a regulation whose benefits are hard to quantify. Does anyone really think SarbOx is making investors 2.4 times safer?

  • 15 Feb 2007 at 11:31 AM
  • SOX

Sarbox: It’s A Darker World In Bond Land

The evidence for the perversity of Sarbanes-Oxley costs keeps mounting. Public companies are losing the most capable executives to privately held firms offering better compensation, less regulatory oversight and less risk of criminal prosecution for business failure. Capital markets are seeing companies exit public markets in favor of ownership by firms funded by pooled private capital. And now the world of company debt is getting darker and less public thanks to Sarbox.
From Bloomberg:

Sarbanes-Oxley, the U.S. law designed to stamp out corporate fraud, is prompting more companies to keep secrets in the bond market.
Siemens AG, Australian retailer Woolworths Ltd., Miller Brewing Co. of Milwaukee and at least 100 other companies are selling bonds that aren’t registered with the Securities and Exchange Commission instead of debt that requires more disclosure. The securities increased 50 percent in the past two years, five times faster than the rest of the U.S. market, according to data compiled by Lehman Brothers Holdings Inc.
“It’s a darker world of the bond market,” said Matthew Eagan, who helps oversee $97 billion in fixed income, including unregistered bonds, at Loomis Sayles & Co. in Boston. “It’s off the radar.”
The private bond sales are flourishing because companies face almost no penalty for keeping their finances away from the public. The millions of dollars in costs to comply with the Sarbanes-Oxley Act of 2002 can wipe out savings from public debt because investors demand only 11 basis points more in yield to buy unregistered securities, Lehman data show.

That is to say, as the cost of compliance with Sarbox and other regulations on public debt approaches the interest-rate difference between private, unregistered debt and public debt, the incentives to have a registered offering vanish.

Sarbanes-Oxley Backfires in Unregistered Bond Sales

  • 08 Feb 2007 at 3:19 PM
  • SOX

Everyone Hates Sarbox

Okay. That’san exaggeration. But one of the most annoying things we hear from a lot of the defenders—think Ben Stein or Thomas Palley—of Sarbanes-Oxley is that critics are just shills for investment banks or corporate executives. That’s never been true. DealBreaker’s long been critical of Sarbox and we can’t even get most corporate executives to answer our calls, much less pay us off to shill for them. (Not that we would, but we’re just saying…)
So it was nice to see that a majority of economists responding to the latest forecasting survey said that Sarbox has had “a negative economic impact.” What’s more, an overwhelming consensus of the surveyed economists agreed that our specific cocktail of regulation, litigation and enforcement is hurting US capital markets.
That clicking sound you hear is the clock ticking on this law. Time is up. Faster please.

Economists: A Pox on Sarbox
[Wall Street Journal]