Wednesday, 1 August 2007

Sarbox not so bad after all that

There's a fair-minded editorial in the FT this morning about the impact of Sarbanes-Oxley - the major corporate governance reform act in the US that came after Enron, WorldCom etc. Many business leaders hate Sarbox (as it is known) and some blame it for the drop in companies listing on the NYSE. (In fact recent analysis suggests that the drop of in listings began well in advance of Sarbox, so another example of people - wilfully? - misreading the data).

Anyway here's the FT's take on it -

Five years of Sarbox
Published: July 31 2007 18:57 | Last updated: July 31 2007 18:57

In July 2002, the Sarbanes-Oxley Act swept into law on a tide of populist indignation over the Enron and Worldcom accounting scandals.

Five years on, Sarbox – intended to restore confidence in corporate America – has become a synonym for heavy-handed regulation, chief whipping boy for those who fear US markets are losing their competitive edge to lighter-touch jurisdictions.

That reputation is largely undeserved. Given the political pressures that rushed the legislation through, its achievements – for example, in promoting audit committee independence – are perhaps more notable. Even companies that have struggled to comply concede that Sarbox has focused attention on the quality of financial reporting.

Yet the Securities and Exchange Commission was unable to prevent some more cumbersome aspects of Sarbox taking effect. The reviled section 404, requiring outside auditors to attest the quality of internal risk controls, was implemented in a way that allowed over-zealous auditors to run riot, imposing unnecessarily steep compliance costs. Many blame the legislation for a fall-off in listings by foreign companies and the measures have undeniably damaged perceptions of US markets.

So the SEC deserves credit for its latest proposals to smooth Sarbox implementation. Christopher Cox, the SEC’s Republican chairman, has won unusual consensus from Democrat colleagues for new guidance that will let management take a more pragmatic, principle-based interpretation of section 404.

The next challenge will be Sarbox’s extension to smaller public companies, which have previously won successive stays of execution. This will require careful handling: even a tailored regime could deter small companies, with limited capacity to comply, from listing.

Yet with compliance costs finally starting to fall, perceptions of Sarbox within the US are improving, and there appears to be little pressure for repeal or radical reform of the legislation.

Efforts to rationalise its application, though, reflect a broader swing towards more flexible regulation, as worries over the US’s competitive position start to eclipse concerns over corporate governance.

While Sarbox has proved a favourite scapegoat for the absence of foreign listings, other factors remain far more significant deterrents – international executives cite the risk of litigation, whether class actions or actions brought by the SEC itself – as the most important.

The US has learnt from Sarbox’s painful introduction, but it should now apply those lessons to a broader regulatory canvas.

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