8/8/2019 John Berlau - Roll Back Burdensome Sarbanes-Oxley Accounting Rules

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202-331-1010 www.cei.org Competitive Enterprise Institue

Roll Back Burdensome Sarbanes-OxleyAccounting Rules

How can we have these levels of fictions infinancials after Sarbanes-Oxley? asks Jim Cra-mer, the colorful host of CNBCs Mad Money.

Maybe because Sarbanes-Oxley (known as Sar-box) is an inherently flawed law: costly to en-trepreneurs and investors, and counterproduc-tive at ensuring financial transparency. As theFinancial Times noted, the inordinate amountof time boards of companies such as the formerBear Stearns spend on Sarbox compliance cameat the expense of their scrutinizing overall busi-ness risk.

Sarbox was rushed through Congress in2002 following the Enron and WorldCom scan-dals. In the last two years, the law has comeunder criticism from all sides. House SpeakerNancy Pelosi (D-Calif.) has criticized aspects ofthe law and said that she supports revising it, tomitigate its unintended consequences. Simi-larly, Sen. John Kerry (D-Mass.), now chairmanof the Senate Small Business and Entrepreneur-ship Committee, laments the laws dispropor-tionate effect on small business

Congress should heed this call. Today, more

than ever, it is essential for mid-size companiesto have access to the equity markets, as thedebt markets have dried up. The Acts Section404 requirement for accountants to sign off onvaguely defined internal controls is costingAmerican companies $35 billion a year in di-

rect compliance costs, according to the Ameri-can Electronics Association. And it adds 35,000extra man-hours for the average public firm,

according to Financial Executive International.Congress should relieve this heavy regulatoryburden by doing the following:

Adopt the Securities and Exchange Com-missions (SEC) advisory committee recom-mendation that smaller public companies beexempt from Sarbanes-Oxleys Section 404and other SEC rules. A letter from sevenDemocratic members of the House SmallBusiness Committee, including now-Chair-man Nydia Velazquez, notes that seniormanagers at these smaller companies nowhave to choose between spending their timeon vital business development functions orSection 404 compliance.Repeal the internal control rules of Section404 or make them voluntary. The term in-ternal controls is undefined in the statuteand has been broadly defined by regulators.And the SEC has found that internal controlpractices are seldom a tip-off to fraud.

Abolish the unaccountable Public CompanyAccounting Oversight Board (PCAOB)and make standard-setters accountableto the President and Congress. Sarbanes-Oxley created this agency to enforce itsaccounting rules. Congress designated the

8/8/2019 John Berlau - Roll Back Burdensome Sarbanes-Oxley Accounting Rules

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202-331-1010 www.cei.org Competitive Enterprise Institue

One Nation, Ungovernable?

board as a private non-profit corporationappointed by the SECa structure thatviolates the Constitutions AppointmentsClause, which reserves such appointment

power to the President or to the head ofa cabinet department. The PCAOB wieldstremendous power without accountability.It levies taxes on all public companies, itcan discipline and fine auditors, and it isresponsible for the broad interpretation ofSection 404s internal control provision.

And the PCAOB wields this power withoutany presidential supervision and minimalSEC oversight. The PCAOBs constitution-ality now faces a court challenge, but re-

gardless of that cases outcome, Congressshould abolish the Boardgiving authorityover accounting back to the presidentialappointees at the SEC, where it was beforeSarbanes-Oxley.

John Berlau