[IP] Richard Rahn on "destructive government": the cost of Sarbanes-Oxley [econ]
Begin forwarded message:
From: Declan McCullagh <declan@xxxxxxxx>
Date: June 16, 2005 10:23:51 AM EDT
To: politech@xxxxxxxxxxxxxxx
Subject: [Politech] Richard Rahn on "destructive government": the
cost of Sarbanes-Oxley [econ]
-------- Original Message --------
Subject: Richard Rahn's "Destructive Government" (The Washington Times)
Date: Thu, 16 Jun 2005 08:01:14 EDT
From: Richard Rahn
The Washington Times
www.washingtontimes.com
Destructive government
By Richard W. Rahn
Published June 16, 2005
The basic function of government is to protect person and property,
but all
too often government does just the opposite. In their zeal to protect
us from
financial fraud, government officials recently engaged in a series of
actions
that have cost tens of thousands of innocent people their jobs,
reduced U.S.
international competitiveness, and destroyed more than $1 trillion in
value for
American shareholders.
Every American now suffers from the excesses of certain prosecutors and
judges, and from Congress' tendency to pass legislation aimed at
correcting what
they perceive as problems without thinking through the consequences
of their
actions. In the wake of the Enron scandal, the government went after
Enron's
auditor, Arthur Andersen, and destroyed the company. The Supreme
Court has just
overturned the conviction of Arthur Andersen. The government's
irresponsible
attack on the company cost 28,000 innocent people their jobs and made
the
auditing business less competitive, which has substantially increased
auditing costs
for every U.S. company. That, in turn, hurts their employees,
suppliers and
customers.
New York Attorney General Elliott Spitzer has just suffered a defeat
at the
hands of a jury for trying to convict a stockbroker for noncriminal
actions.
Mr. Spitzer has used intimidation against a number of companies,
charging them
with actions that may not even be crimes. In essence, he "blackmails"
them into
paying large settlements under the threat of destroying their
business (like
Andersen), though they may be innocent of any wrongdoing. These unfairly
induced, forced settlements are costly to innocent stockholders and
current and
potential employees.
The Securities and Exchange Commission (SEC) and other government
agencies
routinely penalize companies for wrongdoing, even if only a few
executives
engaged in illegal practices. In many such cases, the shareholders
were the victims
of the fraud, yet government fines further increase the shareholders'
loss.
This makes as much sense as if you called the police because your
home had been
robbed, then the government fined you because a robber came into your
house.
SEC Commissioner Paul Atkins has tried to stop this despicable
practice, and
with the impending appointment of Chris Cox as SEC chairman, he may
now have
the votes to do so.
The most outrageous example of the government punishing everyone for the
frauds of a few bad apples was passage of the Sarbanes-Oxley Act.
Peter Wallison,
former U.S. Treasury general counsel and now an American Enterprise
Institute
resident fellow, has just published a study in which he documents the
costliness of the Sarbanes-Oxley Act, with almost no discernible
benefit. As Mr.
Wallison correctly notes, the existing statutes against fraud and the
securities
laws already adequately protect us from those who engage in fraud.
Sarbanes-Oxley (SOX) is a costly and misguided attempt to prevent
people intent on
committing fraud from doing so by substantially increasing regulation
of public
companies. But given there are an almost unlimited numbers of ways to
engage in
fraud, if one is intent on doing so, efforts to regulate the attempt
will almost
always fail.
SOX is a poster child for a government act whose cures are worse than
the
disease. Its provisions are so costly one section of the bill alone
has an
average company cost of $4.36 million, and the regulated companies
will have to pay
$6.1 billion this year alone to comply with SOX. To ensure companies
comply
with the regulations, the four large accounting firms that do almost
all public
company audits have raised their fees an average of 78 percent to 134
percent
in 2004.
Professor Ivy Xiying Zhang of the University of Rochester has
calculated SOX
has resulted in a cumulative loss of $1.4 trillion for the
shareholders of
public companies. (This works out to an average loss of about $460
for every man
woman and child in the United States).
Mr. Wallison goes on to demonstrate there are few discernible and
quantifiable benefits to the legislation. It is also unlikely many
major financial
scandals would have been stopped if the legislation had been in
effect; but, had
they been, their cumulative costs were only a small fraction of the
costs of the
so-called corrective legislation SOX.
Government officials are all too slow to admit and correct their
destructive
laws, regulations and actions. What we need is legislation that gives
citizens, associations and businesses the right to contest in court
laws and
regulations that do not meet a reasonable cost-benefit test. Only
then will government
excess and abuse be brought under control.
Richard W. Rahn is a senior fellow of the Discovery Institute and an
adjunct
scholar of the Cato Institute.
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