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Repealing Sarbanes Oxley Might Spur the Economy – But Would the Security Baby Go Out in the Bathwater

by John Pescatore  |  November 7, 2008  |  1 Comment

The San Francisco Chronicle published an Open Forum piece by Newt Gingrich proposing that Sarbanes Oxley get repealed as part of an economic stimulus package. I don’t think market crashes are very good times to suggest *less* regulation, but it would be nice to see SarBox get focused back on the actual original issue of making it harder to cook the books. 

Now, every regulation at first is good at justifying security spending to management, but quickly becomes an administrative burden diverting attention towards compliance and away from protecting the business.  The regulations and the compliance regimes need to evolve and get tuned – that is what is definitely needed.


Repeal Sarbanes-Oxley

Wednesday, November 5, 2008

Newt Gingrich is the former speaker of the House of Representatives and general chairman, and David W. Kralik is director of Internet strategy and manager of the Silicon Valley office of American Solutions.

It has been six years since Congress passed the SarbanesOxley Act after the devastating accounting irregularities of Enron and WorldCom. While the intent of the law was to prevent corporate fraud, there is growing evidence that it has done more harm than good, and is undermining the venture-capital industry in Silicon Valley. Now, with signs that our economy is moving toward recession, Congress should take this opportunity to repeal the law.

Rep. Michael G. Oxley, R-Ohio, recently said in an interview with the International Herald Tribune that SarbanesOxley was passed in haste. “Frankly, I would have written it differently. … Everyone felt like Rome was burning.”

SarbanesOxley went too far in regulating corporate governance, resulting in at least three unintended consequences.

— It was insufficient at preventing insolvencies and accounting shortfalls in companies such as Bear Sterns, Lehman Bros., American International Group (AIG) and Merrill Lynch.

Estimates from leading figures in the venture-capital community indicate the average company will now take 12 years before it can successfully issue an initial public offering (up from five years preSarbanesOxley) because they do not have enough capital to cover the estimated $4.36 million hidden tax in yearly compliance costs, according to an estimate by the Financial Executives International. (The initial estimate from the Securities and Exchange Commission was approximately $91,000 per company on average.) SarbanesOxley turned out in practice to cost small companies 50 times more than the SEC estimated. Oxley said the law gave the accounting industry “almost carte blanche to do almost everything they wanted to do, which turned out to be far more expensive than anticipated. … They just went crazy.”

In addition, by creating criminal liabilities for board members, SarbanesOxley has made it harder to find experienced members to join corporate boards.

— It initiated a movement among smaller public companies to return to private status or merge. In 2006, the law firm Foley & Lardner LLP conducted a survey of 114 public companies on the effects of SarbanesOxley. Twenty-one percent of companies were considering going private, 10 percent were considering selling the company, and 8 percent were considering merging with another company. These respondents mostly were companies with less than $1 billion in annual revenue.

— It is resulting in a trend where companies choose to go public on foreign, not American, stock exchanges. In 2005, a report by the London Stock Exchange cited that about 38 percent of the international companies surveyed said they had considered issuing securities in the United States. Of those, 90 percent said the onerous demands of the new SarbanesOxley corporate governance law had made London listing more attractive.

The effect of SarbanesOxley in Silicon Valley has been especially dramatic. In the second quarter of 2008, there were no public offerings of Silicon Valley venture capital-backed companies, a phenomenon not seen since 1978. In the third quarter, there was only one. SarbanesOxley has had a direct effect on venture capital. Indeed, if SarbanesOxley is not repealed, then we could see Silicon Valley’s status as a hotbed of innovation erode and see more and more of the future invented outside of the United States.

Bernie Marcus has indicated that he could not have founded Home Depot under SarbanesOxley rules. With a new presidential administration and a Congress convening in less than three months, now is the time to begin thinking through the solutions needed to address our economic challenges. Economic growth in a sound market economy requires smart regulation, not destructive regulation that hurts economic growth. SarbanesOxley fails that test. It should be repealed.

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John Pescatore
VP Distinguished Analyst
11 years at Gartner
32 years IT industry

John Pescatore is a vice president and research fellow in Gartner Research. Mr. Pescatore has 32 years of experience in computer, network and information security. Prior to joining Gartner, Mr. Pescatore was senior consultant for Entrust Technologies and Trusted Information Systems… Read Full Bio

Thoughts on Repealing Sarbanes Oxley Might Spur the Economy – But Would the Security Baby Go Out in the Bathwater

  1. […] John Pescatore is right when he says that talking about less regulation at this time seems to be not aligned with the current crysis, but the article he is pointing to is very precise on saying that the costs from SOX are pretty high and, as we could see, it wasn’t able to prevent cases like Bear Sterns, Lehman Bros., AIG and Merrill Lynch. Accountants are as creative as lawyers, they will always look for breaches in the controls (lawa) to do their magic. […]

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