Finding balance in corporate accountability

The Sarbanes-Oxley Act is another example of how Washington’s good intentions can go bad.

Darren Bernard

The news is never interesting when you know how a story is going to end, which makes this week’s show trials of former Enron executives Jeffrey Skilling and Kenneth Lay hardly worth the public’s attention. The Enron story is the same as the tale of the Titanic: The captains sank the ship; they are about to go down with it.

Much less obvious than the verdicts on Skilling and Lay is the future of the legislation passed on the heels of Enron and its sister scandals of 2001 and 2002. Signed by President George W. Bush to the cheers of investors and as a triumph of bipartisanship, the 2002 Sarbanes-Oxley Act was Uncle Sam’s righteous response to the seemingly endless flood of corporate negligence and mismanagement revelations. Only three lonely House members voted against the sprawling act, which, as it turns out, only shows no one knew what they were voting for.

SOX’s provisions can require something of a background in accounting, but the law’s basic intentions are to promote greater auditor independence and encourage accountability on the part of executives. The statute’s most widely celebrated rules are new protections for whistleblowers – the corporate insiders most likely to expose executive misconduct.

By far the law’s biggest headaches come in Section 404, which addresses internal control requirements and auditing procedures. Without getting into it, many of the rules on internal controls are notoriously vague, compliance demanding and time-consuming, and penalties for making mistakes are severe. The resulting fear and uncertainty among finance executives has driven costs of compliance billions above even the most cynical early estimates.

Alas, the biggest losers are those smaller companies that had the least to do with the pre-SOX scandals. At least 20 percent of public companies – many of them with revenues of less than $100 million – have considered going private thanks to the new legislation. As a rule, the less business a company does, the more it is paying for compliance-related costs as a percent of total revenue. The strain is simply too much for many small firms, which might explain why the number of public companies going private jumped by 63 percent from 2001 to 2002, the year the law was passed.

What’s ironic is that legislation originally intended to make Big Business more accountable to the public has done just the reverse. As often happens when Congress gets into a rush, lawmakers treated the disease by killing the patient.

Thankfully, complaints about the act are becoming loud enough that legislators are beginning to see their folly. Rep. Michael Oxley, R-Ohio, the co-author of the act, has admitted that the statute “was not a perfect document” and parts of it “excessive.” Staff members to the House majority whip Roy Blunt admit “we’ll probably have to make some form of changes,” though when and how is unclear.

The when and how are unclear for a reason. Lawmakers aren’t eager to loosen the corporate noose anytime soon, with the 2006 elections around the corner and Enron brass feeding the press with their tales of corruption.

And agreeing on changes won’t be easy either. The many opponents to SOX reform say any adjustments would amount to a dangerous give-away to Big Business, the result of the shock of Enron and WorldCom finally wearing off. On the contrary to easing some of SOX’s more overzealous restrictions, The New York Times editorialized last year, “The very fact that corporate chieftains are falling left and right shows that more needs to be done. These cases are symptoms of endemic business corruption, and this is no time to start talking about backtracking.”

Unfortunately, a few scattered voices in conservative corporate ranks are clamoring for Congress to ax the whole statute. But that’s hardly a serious prospect at this point, and such extreme demands only give liberal opinion makers (like The New York Times) political points for opposing practical reforms.

The truth is, making life easier for corporations is so unpalatable on the left that any move to change corporate governance laws are sure to be maligned. Americans, as consumers, as employees and as citizens, should know better. Thoughtful reform would safeguard small businesses and reduce compliance costs without threatening the important safety mechanisms SOX is supposed to protect.

Even more importantly, Americans should remember that no regulations guarantee to prevent ill-intentioned executives from doing wrong. There always will be a way around auditors; there always will be a way to cook the books. In this ignominious week of high-profile trials, a responsible Congress would send the message that, whatever the crimes of the doomed Enron execs, corporate bosses need to be trusted to do the right thing.

Sadly, we should expect just the opposite.

Darren Bernard welcomes comments at [email protected]