How SOX Saved America

Opinion: There they go again.

The corporate apologists demanding the repeal or evisceration of the Sarbanes-Oxley Act of 2002 have become a chorus. Just last month, Securities and Exchange
Commission chairman Christopher Cox repeated his intention of reforming (or
defanging) SOX.

And then it will only be a matter of time before crooked books get
to rob investors again.

In case anyone needs reminding, SOX was not passed in a vacuum. It came in
the wake of not one corporate accounting scandal, but a string of them.

The rogues’ gallery of infamous companies didn’t end with Enron — whose accounting misdeeds wiped out the company and helped erode a stock
market nation’s confidence in the markets.

Let’s not forget the implosion of WorldCom, Arthur Andersen, CA, Global Crossing, Tyco and Adelphia, whose perfidious accounting scams left investors holding the bag.

Think back to the post-bubble days from mid-2001 through 2003. Barely a
day went by without some company “discovering” flawed
financial statements. Investors began to flee like pigeons before a snow

From 2002 to 2003, the Dow Jones index began to fall steadily from well
over 10,000 points to below 8,000.

Yes, there was the “correction” in markets following
the dot-com investing mania, a recession and then the events of 9/11, all of which contributed to the decline. But that precipitous drop also spoke volumes
about investor confidence in the integrity of the markets.

According to the National Bureau of Economic Research, the recession
actually ended in November 2001. Yet, stocks didn’t even begin to recover
until 2004, when the initial SOX requirements — that CEOs and CFOs take
personal responsibility for the accuracy of their financial records — first
took effect.

If the last 75 years of American-style capitalism have taught us anything,
it’s that a little bit of regulation goes a long way to ensuring prosperity
for all. Since the Securities Exchange Act was first enacted in 1934, in the
aftermath of the stock market crash of 1929, the U.S. economy has become the
envy of the world.

And yet, the Exchange Act inspired the same kind of free-market hooey from
the geniuses who brought us the Great Depression. Richard Whitney, then
president of the New York Stock Exchange, predicted ominously in his
testimony to Congress that stock trading would be “entirely destroyed” if
that bill were made law.

Of course that didn’t happen. Quite the opposite occurred.
More people, especially retail investors, began investing in stocks,
increasing liquidity and the availability of capital.

Now fast forward to the Sarbanes-Oxley Act. To be fair,
compliance has been very costly. By the end of next year, U.S. businesses
will have spent more than $32 billion on compliance, according to a recent
report by AMR Research.

That’s a lot. But it’s money well spent.

Why? Like the Exchange Act, the SOX regulations help reassure investors of
the accuracy of corporate P&Ls — and enable them to make informed investing decisions – by laying out some very basic rules about the transparency of financial statements.

Most important among them is that CEOs and financial
officers personally attest that their financial statements are accurate, and
that they can say it with a good degree of certainty.
Information technology can help publicly traded companies achieve those

SOX also requires listed companies to have at least one person on their
boards who can read a balance sheet; and it obliges companies to help enable
anonymous reporting for shady business practices — so employees can blow the
whistle without fear of losing their jobs.

These practices make so much sense, you would think they wouldn’t require
legislation. But as long as there are executives who put lining
their own pockets ahead of safeguarding the interests of their shareholders,
we’ll need regulations that keep those behaviors in check.

Plus, SOX has been better for business than anyone would have guessed.
Take a report prepared by McKinsey on behalf of New York City (ironically,
for the purpose of highlighting the negative impact of SOX on the financial
industry). It said U.S. equities markets actually grew at twice the clip of
major European markets, 5.2 percent compound annual growth rate (CAGR)
compared to Europe’s 2.5 percent between 2001 and 2005.

Could it be because investors would rather put their money in a market
that respects the rule of law — and transparency in accounting rules?

That still doesn’t mean complying with SOX is cheap or easy. And yes, there
are some minor inconveniences, such as making people use stronger passwords.
And having to tell the markets the truth.

That’s where information technology comes in. Companies are finding that
compliance becomes cheaper and more efficient when it’s driven by IT. And
safe systems require secure sign-on. Again according to AMR, U.S. companies
have spent over $8 billion on SOX-related technology over the past five
years, investing in things like secure electronic document storage and the
ability to quickly search e-mail and other documents.

But the most surprising thing about this report is that, however grudgingly,
companies are reporting benefits — yes, measurable business gains — thanks
to SOX.

Those include improved business processes, better visibility of their
operations and improved support for their globalization efforts.

But as far as we as citizens are concerned, the most important effect of SOX
is on investor confidence. Because we can’t afford to allow publicly traded
companies to be run under the cloak of obscurity and evasiveness. The very
foundation of our society’s prosperity rests on the confidence we have in
our markets. To roll back SOX would be to nail that confidence on the cross
of ill-gotten, short-term gains.

Michael Hickins is a senior editor for

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