To prepare for my New America Foundation gig today, I refreshed my knowledge of the Sarbanes-Oxley Act (SOX).

It is indeed as bad as I remembered. Rather than new categories of corporate crimes, what is really needed is to make criminal all acts of Malicious Incompetence -- and the first indictees should be the U.S. Congress.

The stock market judged SOX accurately. By the time it moved to Conference, its prospective passage had destroyed $1.4 trillion in shareholder value.

For backup on this, read Sarbanes-Oxley and the Ebbers connection, a fine, succinct analysis by Peter Wallison of AEI. He makes the points that SOX is a hideously expensive, ineffective, and unnecessary response to a few egregious examples of corporate misconduct. (These points have also been documented at scholarly length by Yale prof Roberta Romano, in The Sarbanes-Oxley Act and the Making of Quack Corporate Governance.)

But Wallison focuses on the deeper problems: The impairment of corporate risk-taking; the inherent caution and ineffectiveness of Boards that must, by law, be composed of outsiders with only a tangential knowledge of and involvement in the business; the enshrinement of GAAP accounting standards that are of increasing irrelevance in a time when most corporate value is intangible IP, and the preclusion of innovation in the area of accounting.

Instead of locking the system into a straight jacket of irrelevant data, and making the accountants rich (that'll teach those Anderson people!), more creativity is needed. Analysts should be able to experiment with new ways of assessing companies, and then let investors choose which are the best.

SOX has the brainless quality of a law that says that computers were used in the Enron fraud, so therefore all accounting must done with a quill pen.

posted by James DeLong @ 7:00 AM | Accounting

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