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On 10th Anniversary of Enron Collapse, Time for Sarbanes-Oxley to Go

Ten years ago today, Enron Corp. filed for bankruptcy. Today, with all of its dealings with banks, it would probably have been deemed "too big to fail."

But luckily, this was before Hank Paulson and Tim Geithner occupied the Treasury Department. Enron was allowed to fail, and its executives were punished for fraud under decades-old securities laws.

While there was certainly damage to employees and, temporarily, to surrounding businesses in Houston, the bankruptcy barely caused a blip to the larger economy. The economy, already reeling because of the 9/11 attacks three months earlier, soon had a remarkable recovery.

Rather, the most damaging action of the Enron affair occurred in the aftermath of post-Enron reform. This would be the Sarbanes-Oxley Act of 2002. Ten years later, even the Obama administration agrees that Sarbox's crushing burden of accounting mandates is holding back economic growth.

And Sarbox has little to show in results for investors, having failed to stop Lehman Brothers, Countrywide and now MF Global, which was run into the ground by a former politician who had championed the 2002 law. Jon Corzine's bio on the website BigThink.com states glowingly, "As a member of the United States Senate, Corzine co-authored the Sarbanes-Oxley Act, a piece of legislation designed to crack down on corporate malfeasance crafted in the wake of accounting scandals surrounding Enron, Tyco, WorldCom, and other major corporations."

Yes, it turns out Corzine may have been more of an expert than we thought on alleged "corporate malfeasance."  And as noted  in the October report of President Obama's Council on Jobs and Competitiveness,  Sarbox has crushed the dreams of thousands of honest entrepreneurs for every scandal it may have stopped (and I don't know that it has stopped any.)

Pointing out that “the data clearly shows that job growth accelerates when companies go public,” the Obama jobs council noted with dismay that there were fewer U.S. venture-backed initial public offerings (IPOs) in 2008 and 2009 than in any year since 1985. As I have noted previously, the data also show that even the recession years of the early ’90s had more IPOs than any year since Sarbox went into effect.

Obama's council blamed, among other things, “unintended consequences stemming from . . . Sarbanes-Oxley regulations.” It then amazingly called for exemptions from many provisions of Sarbox for companies with up to $1 billion in market capitalization.

Yet just as amazingly, exemptions that did not go as far as the Obama jobs council recommended were killed this week by three GOP House members who seemed to be in the grip of the powerful accounting industry, which gets rich off the mandates that are so costly to entrepreneurs and the economy as a whole.

This Wednesday, the House Financial Services Committee was scheduled to vote on H.R. 3213, a bill by Rep. Stephen Fincher that would exempt firms with market cap of $350 million and below from the "internal control" mandates of Section 404. This was a far lower figure than the $1 billion put forward by Obama's council and applied to just one section -- albeit the most costly section -- of the law.

Yet as I reported Tuesday in National Review and The Wall Street Journal writes up in an editorial today, GOP Rep. John Campbell (R-Calif.) and Steve Pearce (R-N.M.) had actively worked against the bill. House sources also told me that Rep. Jim Renacci (R-Ohio) was leaning no, and his office did not return my query to confirm or deny.

And, as noted by the WSJ and Ben Smith's column in Politico, committee member Michele Bachmann apparently would not return from her presidential campaign to break the tie, even though she -- like fellow candidates Newt Gingrich, Ron Paul, and Jon Huntsman -- has called for repeal of Sarbox. Smith notes that in contrast, Paul, also a committee member, was ready to return. So the Fincher bill granting modest Sarbox relief had to be yanked.

As I noted in NR:

A claim made by ... Pearce, Campbell, and the accounting lobby is that internal-control audits are essential for fraud detection. Yet financial analysts looking at the subprime scandals in Sarbox’s wake have come to the almost opposite conclusion. By requiring resources to be spent on auditing “internal controls” that were trivial for shareholders yet lucrative for auditors -- such as employee passwords and possession of office keys -- Sarbox Section 404 actually diverted attention away from ensuring accurate reporting of a company’s financial condition.

Commenting on corporate misstatements during the mortgage bubble, respected analyst Janet Tavakoli had this to say on Sarbox to housing journalist Robert Stowe England in his new book Black Box Casino: “Sarbanes-Oxley did nothing. It didn’t work. It was a total waste.”

But who knows? Maybe Sarbox is doing exactly what its champion Jon Corzine wanted it to do!