The post 9-11 environment in this country brought us such laws as the Patriot Act. A knee jerk reaction by congress to look like they were at least doing something to protect us, right?
How's that workin' out for ya?
A similar, but less discussed law is the Sarbes-Oxley Act (SOX). Issued in the wake of the Enron debacle, this new law was meant to strengthen corporate governance at America’s public companies. In reality, the bill was a misguided mishmash of provisions passed in an uncritical hurry by a panicky Congress. Again, they needed to look like they were doing something, right?
How's that workin' out for ya?
Anyone that works at a public company these days can attest that some of the provisions of this law simply make their lives miserable (and I would love to hear your stories here).
To be fair, there are portions of SOX that make sense, and actually are quite effective. Section 404 is not one of them. This 168 word section is strangling the US capital markets, and costing companies billions and billions of dollars. What is it?
Basically it requires the management of a company to document and audit, annually, it's own system of internal controls. And then requires their external independent auditors to provide an opinion on the company's audit and conclusion. Doesn't sound so bad, right? Wrong.
When the law was passed the SEC estimated that it would cost companies about $1.2 billion overall. But then when has the government estimated costs correctly. Current estimates place the actual direct costs at around $35 billion. If direct and indirect costs (including reduced stock value) are included the costs rise to over $1 trillion. These are current costs, and counting...
This is money no longer available to give raises, or provide health insurance. Not available to expand the business to provide more jobs. Not availabe to invest in R&D to find a cure for cancer, AIDS, or the next great green technology. But that's not even the worst of it.
To make matters worse, small businesses are hit disproportionately hard with these costs, as many must make costly software upgrades in addition to hiring extra auditors, and have less overall revenue to absorb these new costs.
Small businesses, if successful, can become big businesses. Create new industries, new products, new technologies, new jobs. We want that here in America. But SOX is chasing them overseas. London actually has an advertising campaign which touts itself as a "SOX Free Zone". The US exchange got 90% of the foreign company IPO dollars in 2000. Know what it was in 2005? 10%.
The urge to avoid SOX is so bad in this country, that many companies, no longer being able to afford to be public, are going private and being bought out by venture capitalists and private equity. Worse still, companies that would normally go public to raise money to expand their businesses now can't. If you're a small business making, say $5 million in profit a year, how can you justify going public and incurring a new $1 million dollar a year SOX cost? Answer is, you can't, so you don't.
As much as we rail and moan about money and the stock market, many times it is the fuel that runs the engine of businesses in this country. Businesses that provide jobs and benefits (albeit not enough of either).
We need to stop sending this overseas. Keep US companies in the US, bring foreign companies to the US. We're better off that way.