June 13, 2005
Investor Confidence Comes at a Price...
There seems to be this perception that investor confidence is free.
There seems to be this perception that the public trusts corporate executives.
How can it be said that the Sarbanes-Oxley Act is not producing results when weekly there are reports from companies that they have material weaknesses?
Additionally, 12% of the most current Accelerate Filer reports contained material weaknesses. Further, there are more restatements than ever before. I am a part of corporate America and I believe in it. But the arrogance of some executives prior to the SOX act being passed had to be stopped.
A dissenting option on this topic:
"If we consider only direct, tangible costs, it appears unlikely that the act can be justified on a cost-benefit basis. The additional costs that it has imposed on public companies--in the form of additional accounting and auditing expenses and the creation of new internal controls--amount to many billions of dollars, but the benefits--if any--accrue only to those companies where frauds might have occurred but for these new regulations. Unless we believe that the potential for financial fraud is pervasive or endemic in American business, it is clear that all companies have been compelled to incur costs that might--at most--benefit the shareholders of very few.
Moreover, it is even doubtful whether this small group of hypothetical companies--those where fraud would have occurred--has actually received any significant benefit, since it is unlikely that better corporate governance and tighter internal controls will actually result in the prevention of fraud or financial manipulation by a management that is determined to do so. The sharp decline in corporate share values when it became clear that Sarbanes-Oxley would become law reflects the market’s verdict on the act: it will impose substantial costs without significant corresponding benefits.
The only way in which the act may be deemed to have benefited all companies and all shareholders is through restoring investor confidence. This, if it occurred, would enhance all corporate value and amount to a significant intangible benefit. However, as noted above, there is no significant evidence that investors lost confidence in the market or in the honesty of corporate disclosure as a result of Enron, WorldCom, or any of the other corporate scandals. On the contrary, there is strong evidence that investors took these scandals in stride, and did not begin to reduce their exposure to the market--or sell off stocks generally--until it became clear that costly legislation would be adopted. If investors never lost confidence, the idea that the act restored--or was necessary to restore--investor confidence is clearly fallacious.
Accordingly, it is extremely difficult to conclude--even at this relatively early stage in its implementation--that Sarbanes-Oxley conferred more tangible or intangible benefits than its tangible and intangible costs. The conviction of Bernard Ebbers and the guilty pleas of the others involved in the corporate scandals that gave rise to the act seem at this point a far more cost-effective way to deter, and thus prevent, financial fraud."
Peter J. Wallison is a resident fellow at AEI. For the complete article, click here.
To learn more about how your company can effectively comply with Sarbanes-Oxley and use it to your competitive advantage, see www.issuescentral.com and receive a 30 day evaluation at no charge to "test drive" the Sarbanes-Oxley Compliance Playbook(tm).
There seems to be this perception that the public trusts corporate executives.
How can it be said that the Sarbanes-Oxley Act is not producing results when weekly there are reports from companies that they have material weaknesses?
Additionally, 12% of the most current Accelerate Filer reports contained material weaknesses. Further, there are more restatements than ever before. I am a part of corporate America and I believe in it. But the arrogance of some executives prior to the SOX act being passed had to be stopped.
A dissenting option on this topic:
"If we consider only direct, tangible costs, it appears unlikely that the act can be justified on a cost-benefit basis. The additional costs that it has imposed on public companies--in the form of additional accounting and auditing expenses and the creation of new internal controls--amount to many billions of dollars, but the benefits--if any--accrue only to those companies where frauds might have occurred but for these new regulations. Unless we believe that the potential for financial fraud is pervasive or endemic in American business, it is clear that all companies have been compelled to incur costs that might--at most--benefit the shareholders of very few.
Moreover, it is even doubtful whether this small group of hypothetical companies--those where fraud would have occurred--has actually received any significant benefit, since it is unlikely that better corporate governance and tighter internal controls will actually result in the prevention of fraud or financial manipulation by a management that is determined to do so. The sharp decline in corporate share values when it became clear that Sarbanes-Oxley would become law reflects the market’s verdict on the act: it will impose substantial costs without significant corresponding benefits.
The only way in which the act may be deemed to have benefited all companies and all shareholders is through restoring investor confidence. This, if it occurred, would enhance all corporate value and amount to a significant intangible benefit. However, as noted above, there is no significant evidence that investors lost confidence in the market or in the honesty of corporate disclosure as a result of Enron, WorldCom, or any of the other corporate scandals. On the contrary, there is strong evidence that investors took these scandals in stride, and did not begin to reduce their exposure to the market--or sell off stocks generally--until it became clear that costly legislation would be adopted. If investors never lost confidence, the idea that the act restored--or was necessary to restore--investor confidence is clearly fallacious.
Accordingly, it is extremely difficult to conclude--even at this relatively early stage in its implementation--that Sarbanes-Oxley conferred more tangible or intangible benefits than its tangible and intangible costs. The conviction of Bernard Ebbers and the guilty pleas of the others involved in the corporate scandals that gave rise to the act seem at this point a far more cost-effective way to deter, and thus prevent, financial fraud."
Peter J. Wallison is a resident fellow at AEI. For the complete article, click here.
To learn more about how your company can effectively comply with Sarbanes-Oxley and use it to your competitive advantage, see www.issuescentral.com and receive a 30 day evaluation at no charge to "test drive" the Sarbanes-Oxley Compliance Playbook(tm).
