WASHINGTON -- Ask nearly any business executive to name the biggest menace facing corporate America, and the answer is apt to be a number: "404." That refers to Section 404 of the Sarbanes-Oxley Act, which requires massive reporting by publicly held companies to prevent recurrences of WorldCom, Enron, Tyco and other scandals. For honest corporate officers, this is classic governmental over-regulation -- a dagger aimed at the heart of the U.S. economy.
The implementation of 404 by the Securities and Exchange Commission (SEC) has created painful demands that drain corporations, large and small, of funds. This is springtime for auditors, with requirements for more of their number to perform the investigations. The most dangerous aspect of this regulatory overkill is a further inclination by corporations to hold onto money rather than put it into productive investment, thereby threatening to stifle economic growth.
This is a peculiar state of affairs to be brought about by a government under Republican control. William H. Donaldson, the Bush-picked SEC chairman, sides with his commission's Democratic members in tightening the screws on business. There are Bush administration officials alarmed over 404, but not enough to ask Congress to bail out business. Rep. Michael Oxley of Ohio, the Republican chairman of the House Financial Services Committee, bristles when anybody speaks harshly about the law that bears his name. The rest of Congress ignores this worsening situation.
In 2002, when Congress was under pressure to move quickly against corporate corruption, the Senate was under Democratic control and the House was Republican. That produced the odd couple of Democratic Senate Banking Committee Chairman Paul Sarbanes of Maryland, a fierce liberal, and conservative Republican Oxley.
Their collaborative product roared through a panicky Congress (passed 99 to 0 by the Senate and 423 to 3 by the House), which hardly gave a second glance at Section 404. It seemed innocuous, directing the SEC to order annual financial reports from corporations. But it imposed unimaginable new burdens on American business.
Seldom has there been a major national problem that has received so little attention from the news media (other than financial publications) or the political world. Yet, for more than a year, CEOs and CFOs have been telling me that 404 is a costly nightmare.
Non-government estimates put the cost for publicly traded companies at $35 billion with a $4.4 million average per enterprise. Beyond the cost is the climate of fear, with executives warned by auditors that inadvertent mistakes could mean a 25-year prison sentence. Financial analysts see this as the principal reason American corporations are hoarding cash, afraid to invest.
Until the advent of the corporate scandals, Mike Oxley was a low-profile Republican with friendly ties to banking in particular and business in general. But he has been infected with something like the Stockholm Syndrome, adopting the mindset of the business-bashing Democrat Sarbanes. They have become joined at the hip, appearing together at business seminars to harangue executives about the value of their legislation.
When the Wall Street Journal editorialized that the conviction of WorldCom's Bernard Ebbers signaled the government should prosecute the guilty and not harass the innocent, Oxley responded with a letter of rage to the editor. In a tone that sounded more like Sarbanes than Oxley, he defended their creation as necessary to prevent "massive fraud" but did not address the unnecessary burden it imposes on American business.
The same edition of the newspaper published a more reasoned essay by SEC Chairman Donaldson, acknowledging that Section 404 "has required significant outlays of time and expense." However, Donaldson tried to reassure executives that "resources now being devoted to Section 404 will, in the long run, prove to be money well spent."
If Oxley's letter read as though it had been dictated at the top of his voice, Donaldson's essay had all the earmarks of being staff-prepared. Indeed, the word in Washington is that, as often is the case with regulators, the chairman has been co-opted by the commission's staff in making life difficult for corporations. That puts him in good company with the rest of the Republican-controlled government.