Messing with SOX

November 03, 2006

Now that Enron CEO Jeffrey K. Skilling has been sentenced (and thus fallen out of the news), the rumblings of discontent over Sarbanes-Oxley are getting louder. Much of corporate America detests SOX, as it's often called, because the law's accounting requirements are extensive and costly. They argue that it was an overreaction to the recent accounting and governance scandals and that Washington needs to amp down the reforms.

At least the language of protest is cautious - so far. President Bush says he wants the law fine-tuned. Treasury Secretary Henry M. Paulson Jr. frets that the regulatory pendulum "may have swung too far." The U.S. Chamber of Commerce has urged an elimination of the law's "unintended consequences."

Indeed, much of the criticism is not wholly undeserved. Certainly it's true that meeting the requirements of the law can put a financial hardship on smaller companies. And CEOs have never been wild about SOX provisions that put the burden of enforcement squarely on them. But there's also ample evidence it's caused companies to look more closely at accounting practices - and uncover deficiencies in the process. And that's helpful not just to management but also to investors who can now have more confidence that financial statements are the real deal.

But the danger is that the Bush administration will go too far. SOX opponents may try to bypass Congress entirely and, with White House assistance, seek changes at the Securities and Exchange Commission and Justice Department. And the effort is widely seen as part of a broader attempt by certain influential business interests to rein in their least favorite forms of oversight, including the litigation brought by state attorney generals and investor class-action lawsuits.

That's worrisome. The Enron debacle is still too fresh a memory to abandon reforms now. If companies are concerned about the cost of SOX compliance, perhaps they can look for savings elsewhere. A recent survey by the Financial Times found the pay and benefits packages of the chief executives of S&P 500 companies have far outpaced their companies' financial performance. Now, there's a cost-cutting idea that both Wall Street and Main Street can embrace.

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