Ron Paul seems to have written a very pointed (no pun intended) argument against Sarbanes-Oxley He suggests that it is a bill hurting US companies. It is dripping with melodrama. Here is the type of “evidence” cited:

Journalist Robert Novak, in his column of April 7, said that, “[f]or more than a year, CEOs and CFOs have been telling me that 404 is a costly nightmare” and “ask nearly any business executive to name the biggest menace facing corporate America, and the answer is apt to be number 404…a dagger aimed at the heart of the economy.”

Funny thing about the mortgage crisis hitting financial institutions, which some people might call the economic menace in America right now, is that it seriously cut down the anti-SOX rhetoric. I guess it is much harder to argue against regulating industries when catastrophes continue to beset them. Should the financial industries be allowed to make giant mistakes, even if they are honest/innocent ones instead of malicious? I suppose the real issue is not so much whether we can really know motives but the consequence of management decisions are clear. How else can regulators define the boundaries of acceptable consequences other than to say fraud and deception is no longer an acceptable practice. Have to draw a line somewhere, no?

Earlier in the speech, Ron Paul suggested that the post-dot-com financial climate shows the type of damage done by SOX.

Sarbanes-Oxley imposes costly new regulations on the financial services industry. These regulations are damaging American capital markets by providing an incentive for small US firms and foreign firms to deregister from US stock exchanges. According to a study by the prestigious Wharton Business School, the number of American companies deregistering from public stock exchanges nearly tripled during the year after Sarbanes-Oxley became law, while the New York Stock Exchange had only 10 new foreign listings in all of 2004.

My memory may be a bit cloudy now, and I am certainly no economics whiz, but that is not the analysis I would have expected. After the crash, many companies were simply not viable and therefore de-listing was a natural effect of their shrink and burnout. 2002, the year SOX became law, was a brutal time for anyone thinking about going public or remaining public to generate revenue. Trust was gone. Companies doing best were the blue-chip ones because confidence-wise they had the more compelling story to tell (Cisco, IBM, HP, etc.) and that was ultimately who gave back the buzz to the Silicon Valley.

Here’s another section in the speech I find strange:

Compounding the damage done to the economy is the harm Sarbanes-Oxley does to constitutional liberties and due process. CEOs and CFOs can be held criminally liable, and subjected to 25 years in prison, for inadvertent errors. Laws criminalizing honest mistakes done with no intent to defraud are more typical of police states than free societies. I hope those who consider themselves civil libertarians will recognize the danger of imprisoning citizens for inadvertent mistakes, put aside any prejudice against private businesses, and join my efforts to repeal Section 404.

Prejudice against private businesses? Makes me wonder if a stop sign a form of prejudice against drivers? Strange to think of a safety precaution as a form of prejudice. Perhaps that analogy is too simple. Are health code regulations imposed on restaurants a prejudice against private businesses?

Incarcerating people for honest mistakes with no intent to defraud? That is clearly not the intent of the law, at least how I have read it. The text states in Section 802(a)1519 that fines and jail are for someone who “knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence…”.

Looks like the authors went to some trouble to ensure honest mistakes were not within scope. Moreover, the law actually states 20 years as the maximum. Again see Section 802.

…shall be fined under this title, imprisoned not more than 20 years, or both.

Where did 25 years come from? Sure, mistakes happen but the goal is to help avoid the big predictable disasters, especially those created through dishonest practices.

And finally, as I sit here and work on compliance projects for JSOX (Japan), Policy 52-109 (Canada), CLERP-9 (Australia) or even Basel II (Europe) for that matter, I can hardly agree that the US has a disadvantage. The world is following the SOX act and so the US actually seems to have been a leader in this area by requiring a baseline of honesty and transparency from businesses. There is no doubt that SOX added a burden to some (especially those least in compliance), and I can see how this burden is higher for smaller companies who are not as equipped to document their compliance efforts, but for all the usual libertarian barking in Ron Paul’s speech about regulations I fail to see any tangible bite.