Two years ago, a Republican Congress and a Republican president enacted the most far-reaching new regulatory controls on Americans businesses since the 1930s. They were reacting to Enron and other corporate scandals. But rather than study the issue carefully first, instead both rushed to do "something" by enacting the Sarbanes-Oxley Act (named for Senator Paul Sarbanes, Democrat of Maryland, and Representative Michael Oxley, Republican of Ohio) in record time.
Republicans are normally skeptical about government regulation of business--with good reason. Regulation is always ham-handed, forcing everyone--guilty and innocent alike--into the same cookie-cutter mold. All must pay the price for the sins of a few, even if exiting laws and regulations, properly enforced, are more than sufficient for the purpose. But fearing bad press, Republicans suspended their normal disbelief in the virtues of regulation and joined to pass a Democratic bill that has severely crippled business expansion.
No one denies that there was a corporate governance problem that came to a head with the Enron scandal. But in their zeal to pass new legislation, no one in Congress ever stepped back to ask what was the magnitude of the problem. Some 12,000 companies are required to file public financial statements with the Securities and Exchange Commission. According to George Benston, professor of accounting at Emory University, no more than a few dozen per year was ever implicated in dishonest bookkeeping. But rather than simply step up enforcement by the SEC, all companies were treated as guilty until proven innocent and forced to comply with onerous new regulatory requirements.
The most onerous provision of the Sarbanes-Oxley legislation is section 404, which requires establishment of extensive new internal controls for financial reporting. A recent study by Financial Executives International, an industry group, found that the average compliance cost for large companies was $4.6 million, involving 35,000 hours of internal manpower, $1.3 million on external consulting and software, and additional audit fees of $1.5 million.
Bruce Bartlett is a former senior fellow with the National Center for Policy Analysis of Dallas, Texas. Bartlett is a prolific author, having published over 900 articles in national publications, and prominent magazines and published four books, including Reaganomics: Supply-Side Economics in Action.
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