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Sarbanes Oxley : Governance : Thought Leader
Thinking Outside The Sar-Box
By
Mallory Factor
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Mallory Factor
Chairman
Free Enterprise Fund
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Mallory Factor, Chairman of the Free Enterprise Fund offering his assessment that the supervisory processes they adopted are ?working well,? Public Company Accounting Oversight Board Chairman William McDonough turned in his resignation, saying he would step down no later than Nov. 30, 2005.
If he thinks the processes are working well, he needs to leave sooner than that.
The PCAOB?s first chairman, McDonough assumed the post ? perhaps, at $550,000 a year the highest paid job in government -- with a broad mandate from Congress to restore investor confidence in public traded companies after Enron unexpectedly collapsed. ?I came to the PCAOB in June 2003 to help it fulfill the great responsibilities assigned to it by the Sarbanes-Oxley Act to protect investors in U.S. companies by overseeing the accounting firms that audit these companies.?
McDonough and his colleagues interpreted those responsibilities in the broadest possible manner. He leaves behind many issues for his successor to deal with, least of all the unintended ramifications of Section 404, which the board has thus far interpreted as requiring public companies to conduct full external audits of all internal control measures.
Implementing and complying with the board?s new accounting rules has imposed enormous costs on U.S. businesses. The selection of McDonough?s successor should be made with great care and the Senate should, during the confirmation process, do its utmost to insure that under its next chairman the PCAOB will address the unintended problems and underestimated costs created by Sarbanes-Oxley.
Except that?s not going to happen.
The Senate has nothing to say about who the next PCAOB chairman will be or their qualifications, a remarkable development given the power the PCAOB, officially a non-profit corporation, has over the U.S. economy. Contrary to established constitutional practice, board members are appointed by the members of the Securities and Exchange Commission, not the president, and do not require Senate confirmation. Where the PCAOB is concerned, the legislative branch is denied the opportunity to wield a critical check and balance on executive power. Senators cannot, in an official capacity, question potential PCAOB appointees or pass judgment on their fitness to serve.
In light of this lack of accountability, it is not surprising that Sarbanes-Oxley has done more to hurt law-abiding, honest U.S. businesses than it has to root out the corrupt, dishonest practices it was supposed to prevent.
This is not a trifling point. The SEC originally estimated Sarbanes-Oxley compliance costs at $1.24 billion. The American Electronic Association estimates the annual cost of Section 404 compliance for U.S. corporations is actually $35 billion. A University of Nebraska study found that, post-Sarbanes-Oxley, the audit fees for Fortune 1000 companies, on average, increased a staggering 102.99 percent.
The cost of compliance is not scaled based on the size of a company?s bottom line, making it particularly onerous for small and mid-sized companies. Corporations with revenues under $100 million spent an average of 2.55 percent on compliance in 2004, versus only 0.06 percent spent by corporations with over $5 billion in revenue, according to one industry study. The early evidence suggests the regulatory costs imposed on the U.S. economy by Sarbanes-Oxley are much higher than originally estimated ? with no reliable data demonstrating the benefit to investors justifies those costs.
And it?s not just the cost to investors. The projected PCAOB budget for 2006 is $137 million. To put that in perspective, in 2002 the House Committee on Financial Services set the budget for the SEC?s entire division of corporate finance and the office of the chief accountant at $134 million. The PCAOB has grown too big, too fast and with too little oversight.
No one condones the corporate malfeasance that produced the political climate resulting in Sarbanes-Oxley. It was serious and severe. Nevertheless, it is still a case of using a howitzer to kill a housefly. Congress, since it does not have the opportunity to police PCAOB?s conduct through the confirmation process, has little alternative but to revisit the law itself, as politically painful as that may be. The benefits of Sarbanes-Oxley reform clearly outweigh the costs, unlike the mandates that the PCAOB has imposed on the U.S. economy.
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