Fixing the Enron fix
CONSIDERING THE DRAMATIC allegations of misbehavior raised at the Enron trial, it might seem an odd moment to propose reexamining the very rules that were imposed in part to prevent another Enron-type disaster. But that’s exactly what the federal government should do.
One problem with the new accounting regulations created under the 2002 Sarbanes-Oxley law is that they treat all companies the same, from General Motors to Just Getting Off the Ground Inc. Under the law, all publicly traded companies must have an independent auditor review their internal controls over financial reports. That’s supposed to ensure that companies can’t hide massive losses or pay crooked executives millions of dollars off the books.
But studies estimate that the extra costs for smaller firms to comply with the rules can run as high as $1 million a year. That can mean not hiring a new employee or scrapping the launch of a new product. For the last two years, companies worth $75 million or less have been given a temporary exemption from the requirements, but that is set to expire next year.
In a few weeks, a U.S. Securities and Exchange Commission advisory committee is expected to recommend that the agency give partial put permanent exemptions to Sarbanes-Oxley’s requirements to companies whose market value is below roughly $800 million, and still more to those worth less than $125 million. While a more reasonable (and politically feasible) approach might simply be to scale reviews according to a company’s size, the report’s recommendations are reasonable.
Critics worry that if small companies get exemptions to Sarbanes-Oxley, larger ones will want them too. Some have suggested the SEC reduce compliance burdens on only the tiniest companies and help small firms find better technology systems to speed up reviews and lower costs. But better technology is currently either unavailable or unaffordable to many firms. SEC changes could happen much sooner.
No one is suggesting that the government let corporate America off the hook or that most of the new law isn’t worthwhile. To see why, ask any of thousands of employees at Enron, WorldCom or Adelphia who lost their life savings when their company’s stock sank like a lead balloon after executives cooked the books. Had Sarbanes-Oxley been in force, the country’s biggest corporate crooks in a generation may have been caught much sooner.
But scale matters -- both to the economy, which is largely driven by small business, and to many publicly traded companies themselves, for which the costs of compliance with Sarbanes-Oxley are often burdensome.
