CEI Praises Obama and House Members For Pushing Sarbanes-Oxley Small Business Exemption

CEI Praises Obama and House Members For Pushing Sarbanes-Oxley Small Business Exemption

Statement of John Berlau, Director of CEI’s Center for Investors and Entrepreneurs

Washington, DC, November 4, 2009 –Today the U.S. House Financial Services Committee voted 37-32 to permanently exempt smaller public companies from Sarbanes-Oxley Section 404, simplifying audit requirements for small businesses. John Berlau, Director of CEI’s Center for Investors and Entrepreneurs, offered the following statement praising the move:

A day after the wrap-up of some hard-fought elections, the Obama administration and 37 Republicans and Democrats on the House Financial Service Committee should be praised for coming together and passing what can be called a true bipartisan stimulus. The committee passed an amendment to the Investor Protection Act to permanently exempt smaller public companies from the burdensome and counterproductive mandates of Sarbanes-Oxley’s broadly defined ‘internal controls.’ This will free the resources of these innovative firms for the creation of new products, new technologies, and new jobs rather than accounting minutiae. The amendment was sponsored by Democrat John Adler and Republican Scott Garrett, both of New Jersey, supported by the Obama administration, reportedly, and voted for by nine other committee Democrats.

Should this bill be passed by the full House and Senate and signed by President Obama, it would be a substantial first step in reforming the misguided law that was rushed through Congress in the wake of the Enron and WorldCom scandals. As I say in CEI’s bipartisan agenda for Congress, Sarbanes-Oxley is “an inherently flawed law: costly to entrepreneurs and investors, and counterproductive at ensuring financial transparency.”

Sometimes called the Accountants Full Employment Act, Sarbanes-Oxley has quadrupled the cost of the audit process for public companies and resulted in the audits of trivial items, such as the number of letters in an employee password, that have little relevance to shareholders. University of Rochester researcher Ivy Zhang calculated that it has cost the economy $1.4 trillion in direct and indirect costs. And new research from economist Kenneth Lehn of the University of Pittsburgh shows that such costs reduce firms’ research and development spending and business investment, two important precursors for job growth.

On top of this, Sarbanes-Oxley has achieved very little tangible results in preventing fraud. In 2007 Countrywide Financial Corp. was praised for its Sarbanes-Oxley controls by the Institute of Internal Auditors. Two years and many scandals later, its former executives have been charged with securities fraud. And certainly, overall transparency doesn’t increase when companies go private or delay going public, as many have chosen to do because of the law’s costs.

Much more needs to be done. Sarbanes-Oxley needs to be overhauled for all public companies, and the out-of-control Public Company Accounting Oversight Board needs to be brought in line with Constitutional accountability, as we are striving to do in CEI’s Constitutional challenge to the law before the Supreme Court later this year. But this exemption would free many entrepreneurial firms – who may be the Googles and Microsofts of tomorrow – from an expensive accounting albatross that also hurts investor return. President Obama and his aides deserve kudos for partially fulfilling, in this one instance, his inaugural promise to pragmatically judge government activities on “what works” and not support government intervention for its own sake.

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