Stossel on Sarbanes-Oxley

At RealClear Politics, there is a John Stossel column about the enormous negative financial impact the Sarbanes-Oxley Act is having on businesses in America. And just what is Sarbanes-Oxley? This comes from Wikipedia.

The U.S. federal Sarbanes-Oxley Act was created to protect investors by improving the accuracy and reliability of corporate disclosures. The act covers issues such as establishing a public company accounting oversight board, auditor independence, corporate responsibility and enhanced financial disclosure.

Officially titled the Public Company Accounting Reform and Investor Protection Act of 2002 and commonly called SOX or SarbOx, it was signed into law on July 30, 2002 by President George W. Bush. It was designed to review the dated legislative audit requirements, and is considered the most significant change to United States securities laws since the New Deal in the 1930s.

The act came in the wake of a series of corporate financial scandals, including those affecting Enron.... [Original formatting and all links omitted. Bold added.]

And here's a glimpse at how the government "protects" investors -- at least from their companies expanding too easily or keeping too much of their own profits.

Suppose you've got a growing business. You've just opened your 100th restaurant, and your company is making just over a million dollars in annual profits. You want to expand further -- spend a million dollars to rent a new building and hire more cooks and waiters. An accounting firm offers you new services that will cost nearly half that, money you might otherwise spend continuing to expand the business.

Do you hire more cooks, or do you hire more accountants?

Under the Sarbanes-Oxley Act, you hire the accountants. The restaurant chain in question is Max & Erma's; its CFO told researchers at the Competitive Enterprise Institute the company will have to pay $500,000 to $600,000 every year to meet the demands of the new anti-fraud law, Congress' attempt to avoid more Enron-like fiascos by making businesses pay accounting firms to keep them in check.

If spending half a million dollars on accounting instead of growth isn't depressing enough, what do you say to $100 million a year? That's what oil giant BP, a British company whose U.S. business generates less than half its income, is paying, according to its CEO. And that figure is just "external costs"; it doesn't include the time the company's own employees spend complying with the new law.

Those wishing for more information on this major intrusion of the government into our economy should stop by The Evils of Sarbanes Oxley, a blog on the subject by Thrutch coauthor Amit Ghate.

-- CAV