Study: SOX Rules Rob Investors of Ability to Build Wealth

Study: SOX Rules Rob Investors of Ability to Build Wealth

Sarbanes-Oxley: Big Cost, Little Benefit
June 07, 2007

Contact: Christine Hall, 202.331.2258

Washington, D.C., June 7, 2007—Sarbanes-Oxley, the federal law aimed at protecting investors from corporate abuses, is actually hurting investors by preventing them from growing wealth, according to a new study by the Competitive Enterprise Institute.

"Enacted after major corporate scandals, the law increases penalties for fraud, but it also contains many mandates that unduly restrict legitimate entrepreneurs," writes the study’s author, John Berlau, the director of CEI’s Center for Entrepreneurship.

But the costs of the 2002 law affect investors, too, warns the study. If "companies do not have the same access to the markets that Wal-Mart and Home Depot did in their early years," investors "do not have the same opportunity to build wealth with them." Berlau notes that since "emerging growth companies [are] an important part of diversified portfolios," Sarbanes-Oxley’s barriers to firms going and staying public could have negative effects on the portfolios of the retiring Baby Boom generation.

The report, SOXing It to the Little Guy: How Sarbanes-Oxley Hurts Small Investors and Entrepreneurs, identifies major flaws in the law, showing it can’t be merely "tweaked." These include:

  • Section 404, the law’s most costly provision. "Section 404 forces auditors and executives to sign off not only on the accuracy of a company’s financial statements, but also on its ‘internal controls,’ a vague term which the law does not define," Berlau explains.
  • Section 301 is another problem. It "mandates the one-size-fits-all requirements that only ‘independent’ directors sit on companies’ audit committees, intruding on the cohesiveness and efficiency of different types of boards."
  • Section 201 "prohibits a company’s auditor from performing any other services for the firm," a prohibition which has "caused costly duplication of many accounting tasks."

Other critics of the current regulatory climate have included House Democratic Leader Nancy Pelosi, Home Depot co-founder Bernie Marcus, and Motley Fool investing columnist Bill Mann.

Berlau calls for a thorough overhaul of the law. He proposes an alternative stock venue free of Sarbanes-Oxley and other SEC requirements, in which fraud would still be punished, but "investors would be able to choose how many preexisting rules are necessary."

Read the study.

Read other publications by John Berlau and the Center for Entrepreneurship.