Wednesday, March 08, 2006

The Sarbanes-Oxley Monster

Former Clinton Commerce Secretary Robert Reich and Wall Street Journal Editorial Columnist Steve Moore were just debating Sarbanes-Oxley, the corporate governance legislation, on Kudlow and Company when Mr. Reich said:
We have a democracy, and most people are going to say, "If we didn't have enough to stop all of those shenanigans, we are going to have to have more."
Rarely have I heard anything more naive from a man of obviously high intelligence. Robert Reich is not a stupid man, he knows a thing or two about the criminal justice system and why laws are required to maintain order in a society. But to suggest that if current laws result in crime the solution is more laws is so absurd, and it almost borders on communist-speak. His comments bring to mind the communist ideal of a "heaven on earth" and "utopian society" by making it so difficult to be bad that all of a sudden, all the criminals will become upstanding citizens.

No matter how many or how few laws are on the books, there will always be people who break them. The whole point of the laws is to ensure that these people are brought to justice. Simply because a few more CEOs, financial officers, and accounting firms are "cooking the books" at various corporations doesn't mean that the current law is too lenient. That is like arguing that because murder rates spiked one year that the law isn't working and we need more laws. You can't come to logical conclusions based on such a limited sample base as Sarbanes-Oxley was. This kind of knee-jerk reactionism is what creates larger, less efficient bureaucracies that attempt to control every malfeasance.

Furthermore, these kinds of sweeping regulations tend to have an ill effect on smaller entities, in this case smaller businesses planning on going public. The increased cost of complying with the new regulations make it more difficult and less appealing for smaller companies to list on the domestic exchange and drives many companies to list abroad.

For an outline on this phenomenon and a solution, see Monday's op-ed by Nasdaq CEO Bob Greifeld in the Wall Street Journal.

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