No sector of the economy has a greater stake in the flow of transparent financial and business information than does tech, which depends on rapid innovation with low transaction costs, fluid investment capital, and the ability of companies to enter into complicated multiparty joint enterprises.

TCS Daily today writes on Undoing SOX’s [Sarbanes Oxley] Unintended Consequences, which have "caused a tremendously expensive amount of paperwork and bureaucracy. And the smaller the company, the greater the proportional burden that has been imposed."

Furthermore, the quality of information is actually declining.

At the same time as the public accounting firms have received [an] unintended, windfall enrichment, they have also become excessively risk-averse and reluctant to give professional advice to their clients on the application of America's complicated rules-based accounting standards. Moreover, having been guided by implementing regulations to focus on remote possibilities and operating in fear of criticism, they appear to have lost all sense of materiality.

The government of course now criticizes companies for responding to the incentives created by the government.

The SEC and the PCAOB (the accounting oversight board created by Sarbanes-Oxley) have sharply criticized the accounting firms for what Sarbanes-Oxley implementation has become. Neither, however, has accepted any responsibility for its own role in generating the huge, unproductive costs for shareholders and profits for accountants.

It is not just SOX, though. The whole accounting enterprise has become a circle of CYA, where the objective is to satisfy nitpicking accounting rules while saying as little of substance as possible. You cannot be sued for what you don’t say. Read a 10K – supposedly the lynchpin of the system – any 10K – and then try describe what business this company is in and how that business works. In an insane Gresham’s Law, the Risk Factors, which are written according to a corporate Precautionary Principle (if one can imagine its going wrong, one must assume that it will go wrong) have driven out serious discussion, and the result is a steady degradation of useful information.

Cypress Semiconductors, headed by corporate iconoclast T. J. Rodgers, recently recounted the game of Twister ™ that management, or an intelligent investment analyst, must engage in to turn the GAAP-required accounting numbers into useful information.

To supplement the consolidated financial results prepared under GAAP, Cypress uses adjusted-GAAP results which are adjusted from the most directly comparable GAAP-based results to exclude certain charges as described below. Management does not consider these charges part of the day-to-day business or core operational activities of Cypress as they result from corporate transactions outside the ordinary course of business. Management uses these adjusted-GAAP measures internally for strategic decision making, forecasting future results and evaluating the Company’s current performance. Most analysts covering Cypress use these adjusted-GAAP measures as well. Given management’s use of each of these adjusted-GAAP measures, Cypress believes these measures are important to investors in understanding the Company’s current and future operating results as seen through the eyes of management. In addition, management believes these adjusted-GAAP measures are useful to investors in enabling them to better assess changes in Cypress’s core business across different time periods.

But there are few T.J.s, so few companies bother.

The only happy people, aside from the increasingly wealthy accountants, are the hedge fund operators. As the mandated information contains more noise and less signal, special information becomes more valuable. This does not necessarily mean inside information; it means only that as the noise increases due to regulation, a professional, willing to spend time and money to do the research to filter it out, has an extra advantage. People bemoan the increasing volume of money flowing into hedge funds, but one reason is certainly that the regulatory debacle is increasing the returns to private investment in information and analysis.

The best way is to stop this madness is probably go to a system of general principles, and let a business of corporate certifiers develop – let Moody’s and S&P figure out the best ways to portray the health of companies, and let investors and corporate partners bet on who is right. Or perhaps a new class of enterprises will have to arise, since the brains of the current firms may have already been liquified by toxic exposure to GAAP and SOX.

Is there hope? Probably not. Perhaps it is like cw about alcoholism or drug addiction – one must hit bottom before there can be hope of honest acknowledgement and recovery. So, has Congress, or the SEC, or Eliot Spitzer, or the press, hit bottom? It doesn’t seem so; they all seem to remain in the full-blown denial stage, which may last as long as an indictable corporate executive remains standing.

So we will remain in the usual dreary cycle whereby regulation screws things up, which is then taken as proof that more regulation is needed. And the hedge funds will laugh all the way to the bank. But maybe other nations will have the sense to start with a blank sheet of paper and refuse to impose accouning nonsense. Sensible US companies are already fleeing to other exchanges so they can avoid the whole mess.