The subject matter of the Economist article “Sarbanes-Oxley: A price worth paying?” is a fantastic Rorschach test for the business community. That is to say, the Sarbanes-Oxley bill is such a complicated piece of legislation that any attempt to analyze it results in the author communicating more about herself than the law. For example, early in the article the author of this piece mentions Alan Greenspan’s praise of the law, but immediately qualifies it as “faint praise” since quickly passed laws that address complex subjects “can normally be expected to fail abjectly.” The author does not explain why this is the case though. Have there been objective historical studies on the efficacy of laws based on the time it took to pass them and the complexity of their subject matter? Or is this, as I suspect, just a free-market believer’s skepticism of government coming out?
On a larger level the Rorschach effect of Sarbanes-Oxley can be perceived in an individual’s cost-benefit evaluation of the bill. On the benefits side, the law created an accounting oversight board; banned auditors from providing non-audit work to clients they audit, thus removing an obvious conflict of interest; required companies to establish independent audit committees; forbade company loans to company executives; forced top executives to certify company accounts, thus creating more accountability; and extended protection for whistleblowers. All of these rules should provide significant comfort for shareholders who have no choice but to rely on the validity of company financial reports when making investing decisions.
On the cost side, implementing the changes required by the law has been financially expensive for corporations.
It seems to me that it is impossible to quantify the value of the benefits, therefore rendering it equally impossible to ever come up with an objective cost-benefit analysis. Instead, we must acknowledge that a person’s position on the value of the law will be predominantly based on their previously established beliefs regarding regulation, corporate integrity, and the relative need for corporate oversight. The author correctly states that people will be debating the value of Sarbanes-Oxley for many years; as long as people have clashing views on regulation, corporate integrity, and corporate oversight, this debate will not end.