SarbOx: Not Just Dumb, But Unconstitutional?

Brian Doherty | December 20, 2006

The U.S. District Court in D.C. is scheduled to hear arguments tomorrow in a lawsuit challenging the constitutionality of the Sarbanes-Oxley corporate finance reform law, filed by the free-market think tank the Competitive Enterprise Institute, the Free Enterprise Fund, and Beckstead and Watts, an accounting firm.

From the CEI press release, the plaintiffs are

asking the Court to declare [SarbOx] unconstitutional under the Appointments Clause of the Constitution. That clause requires major government officials to be appointed by the President and confirmed by the Senate. However, the five-member accounting oversight board is virtually a quasi-private organization with no accountability to the President or the Congress that created it. It has the power to micro-manage companies’ accounting procedures, impose taxes, and fine companies up to $2 million. Complying with the Board’s rules cost the economy more than $35 billion in its first year alone.

Full CEI study on the topic of Sarbanes-Oxley's unconstitutionality.

Full text of court filing by the plaintiffs. (This filing, despite the CEI press release, does not seem to specifically name CEI as a plaintiff.)

My Reason feature roundtable of interviews from various professionals coping with Sarbanes-Oxley's effects, from our January 2006 issue.

Comments

lunchstealer|12.20.06 @ 4:40PM|#

We have used SOX compliance issues to tell some of our more annoying coworkers that we need to be in control of the vendor selection process. So while everyone's running around with SOX paranoia as their default mode, it's been a useful bludgeon to get our way. If you're the first person to say "I need things my way for SOX compliance" you tend to get your way, because NO ONE knows what actual SOX requirements are, so if you pretend you do, others tend to assume you do.

I do feel dirty, though.

|12.20.06 @ 5:20PM|#

We have used SOX compliance issues to tell some of our more annoying coworkers that we need to be in control of the vendor selection process. So while everyone's running around with SOX paranoia as their default mode, it's been a useful bludgeon to get our way. If you're the first person to say "I need things my way for SOX compliance" you tend to get your way, because NO ONE knows what actual SOX requirements are, so if you pretend you do, others tend to assume you do.

Same here. Except I was on the receiving end of those doosies. When the answer to my WHYs was "Uhm its for SOX", I'd just let it go with an "alrite, but its your problem now".

Never felt the desires to call them on this, cause you just know theres a couple managers behind the guys who just foam at the mouth when you questioned a 'its for SOX' statement.

Luckily I now work for non-publicaly traded company.

|12.20.06 @ 5:26PM|#

According to the Financial Times, SOX is the primary reason the majority of IPOs are now happening on the Hong Kong and UK exchanges. Of about 290 this year, only 2 were in NY. The othe 280 were in Hong Kong and the UK, a complete turn around from pre-SOX.

SOX ships jobs overseas.

|12.20.06 @ 5:31PM|#

According to the Financial Times, SOX is the primary reason the majority of IPOs are now happening on the Hong Kong and UK exchanges.

I wouldn't be surprised if it's also driving the (apparent) trend toward taking companies private that I've been reading so much about. (Of course, that might just be confirmation bias on my part.)

|12.20.06 @ 5:35PM|#

Look, people, the important thing is that the government acted in the wake of Enron and the rest. The efficacy of the legislation was someone's else department.

creech|12.20.06 @ 5:45PM|#

And the CPAs are justifying higher fees to privately held corps by claiming they have extra SOX work to do your audit, even if it doesn't apply to you.

|12.20.06 @ 5:47PM|#

"Look, people, the important thing is that the government acted in the wake of Enron and the rest. The efficacy of the legislation was someone's else department."

Makes sense. Someone kills a cop...round up ALL the niggers.

Sam Franklin|12.21.06 @ 7:01AM|#

According to the Financial Times, SOX is the primary reason the majority of IPOs are now happening on the Hong Kong and UK exchanges. Of about 290 this year, only 2 were in NY. The othe 280 were in Hong Kong and the UK, a complete turn around from pre-SOX.

ahhhh, competition in regulatory regimes. Me likee. I knew SOX wasn't all bad. Now we can compare the exchange indices over time and she which regulatory regime maximizes growth.

I imagine that investors in this thd will be dumping money into Hog Kong xchng cos. I say go 4 it!

|12.21.06 @ 9:02AM|#

"According to the Financial Times, SOX is the primary reason the majority of IPOs are now happening on the Hong Kong and UK exchanges."

Citation?

From FT's LEX column, 15 December:

The question is sustainability. US financial markets are enjoying fantastic conditions - boosting profits across traditional parts of banks' advisory, underwriting and trading businesses. On top of that is the cream that comes from innovation as clients require new products. For example, the surge in hedge funds has created huge demand for lucrative prime brokerage services and helped create a market for increasingly complex structured credit products.

The debate about New York's pre-eminence focuses on its loss of market in initial public offerings. That is hardly the right measure, given how small the business is compared with others on Wall Street. But it is clear that financial markets in Europe and particularly Asia will narrow the gap with the heavily penetrated US markets.

This is not a defense of SOX, but let's call things as they are and not get carried away by hype.

|12.21.06 @ 10:35AM|#

I don't know much about SOx cuz I'm in healthcare. I can tell you some eye-rolling stories about HIPAA though.
Basically, it's a boon for software developers and bureaucrats and a pain-in-the-ass and a huge expense for those people who are actually in the business to help people directly.
That was my experience of it anyway.

Sam Franklin|12.21.06 @ 12:32PM|#

Basically, it's a boon for software developers and bureaucrats and a pain-in-the-ass and a huge expense for those people who are actually in the business to help people directly.

Is SOX working as far as leading to an observable decrease in white collar crime, earnings restatements and the other harms that SOX was supposed to prevent?

I follow the SOX thds here, but somehow that particular question never came up. I think it is a useful question, and hope to find an answer someday.

|12.21.06 @ 1:22PM|#

lunchstealer | December 20, 2006, 4:40pm | #
We have used SOX compliance issues to tell some of our more annoying coworkers that we need to be in control of the vendor selection process. So while everyone's running around with SOX paranoia as their default mode, it's been a useful bludgeon to get our way. If you're the first person to say "I need things my way for SOX compliance" you tend to get your way, because NO ONE knows what actual SOX requirements are, so if you pretend you do, others tend to assume you do.
=====================================

As mk implied above (beating me to the punch), HIPAA is a similarly useful bludgeon in health care, for similar reasons. The healthcare informatics company that I work for had been publicly traded, but soon after it was run through the SOX wringer a time or two, they sold out to a foreign company that was only traded on one of the minor European exchanges. While we are exhorted to remain "in compliance," "just in case," the company management isn't having to jump through nearly the number of hoops they faced in the days of direct responsibility for SOX compliance. HIPAA is bad enough.

|12.23.06 @ 1:19AM|#

"Look, people, the important thing is that the government acted in the wake of Enron and the rest. The efficacy of the legislation was someone's else department."

This cynically makes it seem as if there should NOT have been a political reaction to Enron+all the other scandals. It seems like the gist of the posts here is that business will always find a way to screw over its own stockholders. Perhaps (probably) SOX is bad for business, but the markets would be seriously injured if companies were allowed to blatantly lie and screw shareholders.

|12.23.06 @ 6:42PM|#

Oh, the CEI. They're pretty generous people as a rule, aren't they?