Law professor Larry Ribstein at Ideoblog seems to share many of my sentiments about Sarbanes-Oxley. I personally believe that it was feel-good legislation that was enacted too quickly, and therefore not nearly as good as it could have been. It is far too expensive to implement, with few too many benefits (unless, of course, you’re one of the consultants who has made boatloads of money doing SOX consulting).
Larry asks: Would SOX have stopped Naccio? This is in reference to to the insider trading case of Joe Nacchio at Quest. Among Larry’s on-point observations:
This is the sort of speculation that has shored up SOX’s collapsing reputation in recent months. We’re told to disregard all we hear about huge costs, because SOX had some sort of effect in increasing disclosure and restoring investor confidence. In other words, even if costs are quantifiable, benefits aren’t. Sort of like MasterCard — priceless. This sort of reasoning is generally hard to refute, which of course is its point.
Right. It’s too expensive. Too few benefits. Don’t try to tell us differently.
Even more prolific:
<>SOX was not designed to stop fraud at the top. We have learned time and again that a determined CEO can thwart internal controls. Brown’s op-ed argues that Nacchio was precisely that sort of executive, who sought to control disclosures at his firm. SOX might have made this more difficult, but it’s a stretch to assume it would have prevented the result.
Exactly my point, Larry. Fraud cannot be legislated away. It takes a strong corporate culture that does not tolerate dishonesty. This is built over a period of years, and maybe even decades. It is reinforced with swift action against anyone who violates the ethics rules outlined in the company code of conduct.
And Larry mentions an excellent example of the failure of SOX: Refco. Sarbanes-Oxley did nothing to prevent or detect the fraud at Refco. Investors weren’t protected from dishonest executives. The “oversight” provided by the external auditors didn’t stop the fraud.
And I leave you with one parting thought from Larry:
SOX has not suddenly made people more honest. At best, it has increased the costs of fraud, but of course without reducing the benefits.
Excellent, excellent comments!
How do you measure excessive Sarbanes-Oxley costs? From companies I am familiar with, the fee to auditors for their internal control certification is about 1/3 of the CEO salary, which doesn’t seem all that unreasonable to provide greater assurance to the shareholders, particularly when the CEO isn’t being diligent about his certification. Perhaps the audit committee should have asked more questions about the external auditors capabilities of auditing a company the size of Refco. Maybe a larger auditor would have had a better skill set.
Good question. Are you talking about just the “audit” portion of the certification, or the whole process of SOX compliance? Because the whole process of compliance has been much more expensive than 1/3 the CEO salary. It has been a process that has taken companies 1 to 3 years to do, with extensive invovlement from outside consultants.