Published October 27, 2011
Lost in the hoopla surrounding Texas Gov. Rick Perry's roll-out of his flat-tax policy on Tuesday was his simultaneous call for the repeal of three laws: President Obama's health care initiative, the Dodd-Frank reform of the financial services sector -- both standard fare for conservatives this year -- and one other statute, an obscure provision of a law that has been on the books for nearly a decade.
The last of Perry's repeal targets was Section 404 of the Public Company Accounting Reform and Investor Protection Act, better known as Sarbanes-Oxley, or SOX for short. It was a landmark overhaul of the accounting and bookkeeping practices of publicly traded companies.
Enacted in the wake of the Enron and WorldCom scandals and the ensuing collapse of auditing giant Arthur Andersen, the measure was named for its co-sponsors -- Democratic Sen. Paul Sarbanes of Maryland and Republican Rep. Michael G. Oxley of Ohio -- and signed into law by President George W. Bush in July 2002.
Long seen as the law's most controversial provision, Section 404 requires public companies to include in their annual reports both the firm's own assessment of its "internal controls" and an outside auditor's assessment.
Now, in a campaign season where excessive regulation has emerged as an improbable yet potent issue on the stump, Sarbanes-Oxley and its legacy are drawing new scrutiny on the 2012 GOP presidential campaign trail.
And not just from Perry. Number 10 in the 59-point economic plan put forward by former Massachusetts Gov. Mitt Romney last month is a pledge that the candidate, if elected, “will seek to amend" Sarbanes-Oxley, to make compliance with it "less onerous" for mid-sized companies. While Romney did not mention Section 404 explicitly, there was no mistaking which provision he had in mind.
Former House Speaker Newt Gingrich and Rep. Michele Bachmann of Minnesota have both called for the outright repeal of Sarbanes-Oxley. And so, too, has Rep. Ron Paul, who has the strongest record on the issue: The self-declared libertarian from Texas was one of only three House lawmakers who voted against Sarbanes-Oxley back in 2002.
Estimates of the costs that Section 404 has imposed on American businesses have varied. In testimony before the House Financial Services Committee last month, J.W. Verret, a scholar at the conservative Mercatus Center at George Mason University, told lawmakers the Securities and Exchange Commission vastly underestimated how much Section 404(b) -- the part requiring outside audits -- was forcing firms to shell out. The agency's initial projection of $91,000 per company, he said, later gave way to a revised SEC estimate of $2.87 million.
"Some large firms pay $5 million a year. The smaller firms, it's even worse. They pay a lower amount, but it's a much higher part of their revenues," Verret told Fox News. "Investors are paying in the form of lower returns. That money is spent on just paying more to auditors and accountants to really help these companies comply with the new red tape."
Similarly, economist John Berlau of the Competitive Enterprise Institute, a conservative think tank in Washington, notes that in the years prior to Sarbanes-Oxley's enactment, the median market capitalization of a company going public was $52 million; today, that figure stands at $227 million.
"This means that average investors are now often shut out of the company’s growth to the $200 million mark," Berlau has written. "As a result, these companies do not have the same access to the public capital markets that Wal-Mart and Home Depot did in their early years. And individual investors do not have the same opportunity to build wealth with them."
After serving more than a quarter-century in the House and leaving office almost five years ago, Oxley practices law and advises both his private clients and the federal government on how to navigate thorny corporate governance issues. Interviewed in Washington this week, the former lawmaker defended his signature piece of legislation but acknowledged that it may be time to re-examine and revise selected portions of it -- including Section 404.
"This was all about accounting fraud, and I think a lot of people forget a little bit about the history of Enron and WorldCom, and some of these tragedies that cost people their jobs and their life savings," Oxley told Fox News. "We've not had, as far as I know, a single case of the kind of broad accounting fraud that occurred in Enron and WorldCom. ... So from that perspective, I think it's been quite effective."
While he agreed that the costs of Section 404 "outweighed the benefits" in Sarbanes-Oxley's initial years on the books, Oxley argued the two are now "starting to come into a little bit more equilibrium," thanks to revised SEC procedures and smarter, more efficient practices and technologies utilized within the regulated firms.
"Frankly, the large corporations have come to terms with it. It's the cost of doing business," the former lawmaker said. "A lot of people I talk to now say that they feel that it was tough medicine, but in many ways, you needed that to restore confidence in the investing public."
To reduce costs further, Oxley said he would be open to an amendment of the law whereby those companies that have consistently demonstrated excellent compliance with Section 404 could be allowed to post the requisite audits once every two years, instead of annually.
In various precincts of the nation's capital, an appetite for such revisions appears to be growing.
The Capital Markets and Government Sponsored Entities Subcommittee of the House Financial Services Committee voted earlier this month to exempt for Section 404 those companies with market capitalization of up to $350 billion.
Surprisingly, the GOP-controlled panel was outdone in this regard by President Obama's jobs council, which recommended an exemption for all companies with market capitalization of up to $1 billion. And even House Minority Leader Rep. Nancy Pelosi, one of the chamber's most liberal Democrats, has said of Sarbanes-Oxley, "I don't think you need the whole package."
"We didn't write (the law) in stone," Oxley told Fox News. "I think it's highly likely and probably a good thing that you'd have some revisions."