Sarbanes-Oxley Challenge Is Rooted in Law’s Flaw

Re: Jane Bryant Quinn’s column, “Accounting Cleanup Board Is Facing a Gutting’’ (July 16):

In her attack on our constitutional challenge to the Sarbanes-Oxley Act and the Public Company  Accounting Oversight Board (PCAOB) that this law created, Quinn disregards her own good advice to investors.

When it comes to investment products, Quinn has rightly warned against taking sales pitches at face value and urged careful scrutiny of risk and return. Yet she has failed to perform this due diligence in evaluating Sarbox and the PCAOB, instead writing a rosy, unsubstantiated review of what the law has supposedly accomplished while ignoring its huge costs to both entrepreneurs and investors.

Quinn writes that even exempting smaller public companies from Sarbox’s onerous accounting mandates would be “a thumb in investors’ eyes.’’ Yet she comes up short in providing evidence of any tangible benefits investors have received from this law.

Quinn points to the jump in companies’ earnings restatements the law has induced as proof that it has given investors “sharper financial information.’’ But a report just released by the Security and Exchange Commission’s Advisory Committee on Improvements to Financial Reporting shatters the notion that this increase in paperwork has served investors well.

The committee concluded that many restatements produced in the current regulatory atmosphere “may not be important to investors,’’ and that the restatement process “creates significant uncertainty regarding the size and nature of the effects on the company of the error’’ at hand.

This coincides with earlier reports that Sarbox’s internal control mandates, as interpreted by the PCAOB, were leading auditors to look at minutiae such as possession of office keys, the number of letters in employees passwords, and other controls that have little to do with the accuracy of financial statements.

What Quinn describes as “the financial crisis linked to subprime loans (that) left the valuation of trillions of dollars of securities in doubt’’ isn’t, as she asserts, a reason for maintaining Sarbox. Rather, it is evidence of the law’s failure.

While the law has forced big and small public companies to spend billions of dollars on trivial matters, its ostensible goal of more accurate valuations of complex financial entities was overlooked.

Ironically, as late as last year, now-troubled mortgage lender Countrywide Financial Corp. was praised by the Institute of Internal Auditors’ Research Foundation as a case study of excellent Sarbox compliance. This it may have been, but that’s of little solace to shareholders today stung by the firm’s neglect of other important risks.

In the meantime, legitimate entrepreneurial firms have found the costs have quadrupled for being a public company, according to the Sarbanes-Oxley Compliance Journal. Home Depot Inc. co-founder Bernie Marcus has said that his company couldn’t have gone public when it did if Sarbox had been in place. This hurts investors as well, because they are effectively locked out of the potential return of growing businesses that are delaying going public.

The PCAOB’s unconstitutional structure, in which it lacks accountability to both Congress and the president, has contributed to these costly and counterproductive mandates.

Should our lawsuit prevail, it will not be a stick “shoved into the spokes’’ of better accounting, as Quinn puts it. It will instead be a much-needed change in direction for both investors and entrepreneurs.

John Berlau
Director, Center for Entrepreneurship
Competitive Enterprise Institute
Washington Aug. 14, 2008