by Matt Olberding

Created on: October 24, 2008

The Sarbanes-Oxley Act has done little good while greatly increasing auditing costs, especially on small corporations.

The logic behind Sarbox was good - make sure companies have adequate internal and external controls to ensure financial statements are honest and accurate - but like many laws that are passed as a knee-jerk reaction to something, it was like using a shotgun to try to kill a mouse.

Sure, the fraud fiascoes that occurred at Enron and Tyco might not have happened if Sarbanes-Oxley had been in place at the time, but the law sure didn't stop the subprime mortgage mess. It didn't stop banking and mortgage company CEOs from looting the till while their companies sank under the weight of bad business decisions. Nor did the law do anything to help the Enron and Tyco shareholders who got screwed in the process.

So what has Sarbox done? Well it has cost so much in additional auditing fees that the government has already amended it to be less of a burden on smaller companies. For example, during 2004 U.S. companies with revenues exceeding $5 billion spent .06% of revenue on Sarbox compliance, while companies with less than $100 million in revenue spent 2.55%. And another side effect of Sarbox has been that some companies have chosen to go private, thereby greatly lessening the amount of public scrutiny they are subject to. Sarbox has also put U.S companies at a disadvantage to their foreign counterparts.

No matter what laws are in place, there will always be immoral, greedy people who will do anything for a buck. And there will also always be overconfident, egotistical CEOs who will go to any lengths to cover up failure. I doubt Sarbanes-Oxley would have stopped Ken Lay or Dennis Koslowski. They and their conspirators probably would have come up with elaborate ways to defeat the law.

However, I believe the Lays and Kozlowskis of the world are the exception rather than the rule. I think most CEOs at public companies have, at the very least, their shareholders' interests interests at heart, if not their employees' as well.

That, of course, doesn't mitigate the need for regulation. I think the current financial meltdown has reinforced that point. But I would contend that Sarbanes-Oxley is over-regulation.

With a few notable exceptions, the system in place worked fine before Sarbanes-Oxley, and I would contend that it would work just fine again without the law.

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