The Sarbanes-Oxley Act, enacted July 30, 2002, was a classic case of a knee-jerk government action that did lots of harm and very little good. The goal was to reform public company accounting rules to avoid future scandals like those that played out at Enron, Tyco, Adelphia, Peregrine Systems and WorldCom. But the practical effect was to kill the initial public offering market in the U.S.
Former Speaker of the House Newt Gringrich (listen to my interview with him last May) and David Kralik are now calling for the repeal of Sarbanes Oxley. In an Op-ed piece in today’s San Francisco Chronicle, they outline the many problems created by the act:
- It didn’t prevent insolvencies and accounting shortfalls in companies such as Bear Sterns, Lehman Brothers, American International Group (AIG) and Merrill Lynch.
- The average company will now take 12 years before it can successfully issue an initial public offering (IPO) (up from 5 years pre-Sarbanes-Oxley) because they do not have enough capital to cover the estimated $4.36 million hidden tax in yearly compliance costs (The initial estimate from the Securities and Exchange Commission was approximately $91,000 per company on average).
- Smaller public companies went private or merged: “In 2006, the law firm Foley & Lardner LLP conducted a survey of 114 public companies on the effects of Sarbanes-Oxley. Twenty-one percent of companies were considering going private, 10 percent were considering selling the company, and 8 percent were considering merging with another company”
- U.S. companies are going public on foreign exchanges to avoid the Act: “In 2005, a report by the London Stock Exchange cited that about 38 percent of the international companies surveyed said they had considered issuing securities in the United States. Of those, 90 percent said the onerous demands of the new Sarbanes-Oxley corporate governance law had made London listing more attractive.”
- They also quote Representative Michael Oxley, one of the original sponsors of the bill, who said “Frankly, I would have written it differently…Everyone felt like Rome was burning.”
Why the San Francisco Chronicle? Because Silicon Valley may be the hardest hit region:
In the second quarter of 2008, there were no public offerings of Silicon Valley venture capital-backed companies, a phenomenon not seen since 1978. In the third quarter there was only one. Sarbanes-Oxley has had a direct effect on venture capital. Indeed, if Sarbanes-Oxley is not repealed, then we could see Silicon Valley’s status as a hot-bed of innovation erode and see more and more of the future invented outside of the United States.