The law intended to protect investors from corporate crooks has been criticized for its heavy-handedness, but let's not give up on it just yet.
A Times Editorial
Published May 22, 2005
The Sarbanes-Oxley Act that is supposed to restore credibility to corporate finances has come under fire from those it regulates. Bob Merritt, Outback Steakhouse's chief financial officer, provided a local example. He announced his retirement from the company last month, at age 53, largely because of the 3-year-old law's heavy hand.
"I don't know of a single CFO of a publicly traded company who hasn't thought about quitting in the last six months," Merritt told the St. Petersburg Times, citing the law's evolving regulations and threat of liability at the top for anything that goes wrong below.
Could the medicine prescribed for the plague of corporate scandal be worse than the disease? It is too early to conclude so, although if the law stifles creativity and competitiveness, it may need a tweak or two.
Federal Reserve Chairman Alan Greenspan recently felt compelled to defend the law, which was written while the pain of accounting fraud at Enron and WorldCom was fresh. "I am surprised that the Sarbanes-Oxley Act, so rapidly developed and enacted, has functioned as well as it has," he said, in a commencement speech that noted the compatibility of business success and ethical behavior.
Corporate executives are particularly wary of the law's requirement that they take responsibility for their company's financial statements, fearing they will be held personally liable for something unknown or out of their control. Indeed, there is a need for common sense, if that commodity still exists, in enforcing the law. Executives at Enron and WorldCom knowingly violated the law, a sin of commission that deserves harsh punishment.
Yet executives who chafe under SOX, as the law is commonly called, need to be reminded of their duty to employees and the investing public. The law's penalties are "not all bad," said Thomas McCormick, a SOX compliance officer at Dow Chemical. "A little fear can deter a lot of wrongdoing."
That is the point. As the Securities and Exchange Commission interprets SOX regulations in response to corporate complaints, it shouldn't weaken the law's intent. Perhaps accountants have overplayed their hand, using the law to boost fees. In fact, the SEC reported, "it appears some nontrivial costs may have been unnecessary, due to excessive, duplicative or misfocused efforts."
So streamline the audit process, but don't give up on the law just yet. Wall Street works best when fear and greed are in balance.
