Four Years After Enron

Four Years After Enron: Assessing the Financial-Market Regulatory Cleanup, by Roy C. Smith and Ingo Walter (professors of finance in the Stern School of Business at New York University), offers more evidence that the benefits of Sarbanes-Oxley is exceeded by its costs. The article is published in The Independent Review, v. XI, n. 1, Summer 2006, pp. 53-66, published by the Oakland, California based think tank, Independent Institute.

The authors point out that SOX lacks a central theory and duplicates some existing power and authorities, and they do reach some sound conclusions, such as:

These measures may have satisfied a sense of public outrage that followed a revelation of greed and misconduct, but if a cost of the clean up is to affect adversely the prospects for economic growth and to obscure rather than clarify regulatory standards for the future, in an effort to prevent a small percentage of otherwise fully regulated American companies from committing fraud, then perhaps the cost is excessive, especially inasmuch as the clean-up effort has left untreated certain important defects in the system that may surface again later.

Though I have serious misgivings with their optimism regarding the potential of SOX to be amended to reduce its most egregious costs, as when they state:

Excessive regulation causes as much harm as insufficient regulation. The Sarbanes-Oxley Act and the SEC may have pushed regulation somewhat too far. If so, time will tell, and the act can be amended or the SEC can reinterpret the requirements for its enforcement.

I can think of very few instances throughout the history of government regulation when it has been modified or eliminated. The natural proclivity is for regulatory bodies to expand, since it is in their self-interest. In fact, economists have even coined a term—regulatory capture—to describe how regulatory bodies become captured by the interests of the very industries they regulate.

I also found their exhortation for "capitalists themselves should attempt to contribute to a consensus that good business is fair business" to be condescending and mamby-pamby. What businessperson doesn't already believe this? Most executives are ethical, since enterprise is a serious moral calling. One does not become successful by ripping off one's fellow man.

Despite my misgivings, the article is worth reading if you're at all interested in SOX. It's another arrow in the quiver that aims at the heart—and hopefully the ultimate elimination—of SOX.