The ERM Current™

A few weeks ago, The ERM Current™ included a blog entry about former US House Speaker Newt Gingrich’s call for the repeal of the Sarbanes-Oxley Act.  Many of Mr. Gingrich’s claims supporting his rationale that Sarbanes-Oxley is responsible for our current economic downturn were simply wrong.  Well, someone else also noted his poorly constructed argument and provided an alternative view last week in an op-ed article for the San Diego Business Journal.  Wade Lindenberger provided a compelling counter-point argument in his column as well as a practical view of the evolving nature of Sarbanes-Oxley Act compliance efforts.  He noted,

“In a time like this, people are always looking to blame something for the financial meltdown and turmoil. Sure, we are in a serious financial situation right now, but Sarbanes-Oxley is not to blame. In the six years since Sarbanes-Oxley was enacted, failures like Enron and WorldCom, which resulted mainly from finance and accounting shenanigans, have been nonexistent. The most recent failures of companies like Bear Stearns and Lehman Bros. resulted from poor business decisions and absentee risk management, all driven by good old-fashioned greed.”

Those who continue to seek to repeal Sarbanes-Oxley are simply attempting to skirt the real issues at hand and also avoid future accountability for business-related fraud.  Mr. Lindenberger sums up the situation nicely by stating the following,

“When it comes down to it, the steps legislated by Sarbanes-Oxley are really nothing more than what we would expect from any thorough, well-run company.”

Last week, former US House Speaker Newt Gingrich wrote an opinion in the San Francisco Chronicle renewing the call for a repeal of the Sarbanes-Oxley Act of 2002 (“SOX”).  Mr. Gingrich’s basic premise is that SOX went too far in regulating corporate governance and at the same time did nothing to prevent the collapse in financial markets.  As many others have complained in the past, Mr. Gingrich says that SOX is too costly and is preventing companies from going public.  Mr. Gingrich cites a $4.36 million cost per company from a recent Financial Executives International (“FEI”) survey.  However, he fails to mention this figure is for the largest of companies (those with a market value greater than $700 million) and is out of date.  The most recent FEI survey figure for the largest companies is actually lower ($3.8 million) and for smaller companies that he is referencing in his IPO argument, the average cost is just over $600,000.  

Now, let’s compare that to the updated “rescue” package for AIG.  Just this week, the package was increased to $150 billion.  That’s right – billion with a “B”.  And, as for the claim that SOX did nothing to prevent AIG’s woes, it actually helped bring the woes to light.  It was the external auditor’s disclosure of a material weakness in AIG controls (a SOX requirement) over credit default swap valuations that first held AIG management accountable and led to the departure of the CEO.  

Lastly, Mr. Gingrich says that SOX is driving companies overseas.  Well, if that is the case, then the “rescue” packages are certainly serving as a great incentive for companies to come back to the US.  Now, companies are lining up to receive US taxpayer money.  Those companies that do not want to be held accountable when accessing capital through public markets are probably better off in other markets.  SOX is not the problem – it is the “rescue” packages that need to be repealed.