Stunting Corporate Growth

Stunting Corporate Growth

Berlau Letter in The Washington Post
December 31, 2004

<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" /> Robert J. Samuelson [op-ed, Dec. 22] dismissed legitimate concerns about the effects of the Sarbanes-Oxley Act on the risk-taking behavior he deems necessary for economic growth. The law is having an effect on public companies, not just in time spent on compliance, but in financial costs and constraints on innovation through its micromanagement of corporate structure. The law firm Foley & Lardner found that Sarbanes-Oxley has increased the costs of being public by an average of 90.4 percent for middle-market public companies. The firms' survey also found that the firms' accounting, audit and legal fees have doubled. While this can be costly to Standard & Poor's 500 firms, it can be prohibitive for smaller companies, which often are the innovators in creating new jobs and products. According to the accounting firm Grant Thornton, the number of companies going private in 16 months after the law was passed increased 30 percent over the 16 months before the law's enactment in 2002, even though the economy was better. Many new firms cannot go public to raise the capital to start on the road to possibly being the next Microsoft because of the compliance costs of this law. The law establishes criminal penalties for executives in some cases if earnings are misstated, yet it prevents these executives from having any say in hiring the firms that audit the statements; they must be chosen by independent directors. It forces businesses to do a "Mother may I" with accountants for every internal financial control. Sarbanes-Oxley is a big contributor to the risk aversion Mr. Samuelson described. The law punishes employees, shareholders and honest entrepreneurs instead of targeting the few executives who committed misdeeds. JOHN BERLAU Warren T. Brookes Journalism Fellow Competitive Enterprise Institute Washington