In the best of times, Sarbanes-Oxley is an unecessary tax on the productive. In the worst of times, it’s useless. The financial crisis proved what a miserable failure it was, and if there were any justice Paul Sarbanes and Michael Oxley would hang their heads in shame.
But politicians are insane, and since the definition of insanity is doing the same thing over and over again expecting different results, some kind of SOX on Steroids seems inevitable. But suppose we lived in some fantasy land where regulators applied reason and logic to such situations, what kind of steps might we take.
Eliminating SOX altogether is probably a fine idea, but what about making it optional? Larry Ribstein thinks it’s a feasible outcome
But given the difficult politics of calling for a rollback now, and even on policy grounds, it’s worth exploring an alternative: make it optional. That would let the small firms avoid the “tax” while letting large firms, and particularly financial firms, post a SOX “bond” to assuage wary investors. Indeed, Bobby Bartlett, in Going Private but Staying Public, has found that some firms that could avoid SOX apparently have been doing just that. For the small firms, the economic effect of optional SOX would be equivalent to a significant tax break or subsidy, but without burdening the taxpayers (though the hit to accountants would be substantial).
You might think that’s some kind of a joke — why would any company voluntarily adopt some optional tax/regulation? Well why do companies strive for LEED Certfication (green buildings) or TRUSTe-endorsed websites? For companies of a certain variety, it makes sense to show that they can clear a certain hurdle. Investors could then decide — is it important that a given company show SOX compliance, or is the company demonstrating its transparency in some other way. In fact, non-SOX compliance could emerge as the stronger indicator of corporate health, where as SOX compliance might signal “We have poor standards, but we’re going to hide behind this Good Housekeeping Seal of Approval“.
Disregarding hard-and-fast rules coule help in a number of areas. Rather than requiring a single rule about expensing stock options, why not let companies decide what makes the best sense for them, and then offer another chart as if they had used the current rule. Or why not let compute the value of their assets using whatever model they like, as well as marking them to market — their counterparties and investors could then go with whatever they think makes most sense.If there’s one thing the crisis has taught us it’s that we don’t need more reliance on third party standards and seals that reduce the need to actually do some due diligence. By reducing our use of blanket rules and regulations, participants might actually be forced to pay attention.
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