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Friday, December 01, 2006

Two Views of the Capital Markets Committee Report

The Committee on Capital Markets Regulation, a private group of Wall Street leaders, has issued its interim report of suggestions for regulatory change.  (I'd recommend downloading the "low resolution" version -- quicker and just as legible.)  Much like the Iraq Study Group, the Committee is intended to be a bipartisan assembly of respected authorities who deliver a compromise solution to a thorny problem.  Peter Lattman at the WSJ Law Blog has a concise and informative post on the report, a specific post on "pay to play" recommendations in the report, and a nice summary of the backlash.

Reactions to the report have been decidedly mixed.  But I found it interesting that two law professor bloggers have had quite different takes on the ramifications of the report itself.  Over at Ideoblog, Larry Ribstein believes the report is "a vindication of the views I've been expressing on SOX and the whole regulatory structure, particularly over the last four years."  Over at Conglomerate, however, Lisa Fairfax notes:

Interestingly, however, the report strongly suggests that Sarbanes-Oxley is not the problem. Indeed, the report makes 32 recommendations, only six of which focus on reforms associated with Sarbanes-Oxley, and those six are relatively modest proposals about how the Act should be implemented differently (including possible exemptions for small and foreign companies). Moreover, the report states at the outset “we recommend no statutory changes in the Sarbanes-Oxley Act, including Section 404.”

Given the recent scholarly criticism of Sarbanes-Oxley (including Roberta Romano's characterization of "quack" corporate governance), it is noteworthy that the Committee only takes issue with the enforcement of the Act, and not the Act itself.  Perhaps Sarbanes-Oxley will survive unamended even in the post-post-Enron period.

Posted by Matt Bodie on December 1, 2006 at 03:50 PM in Corporate | Permalink


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I have a dim recollection, from my days as an undergraduate economics student and from my regulated industries and ad law courses in law school, of a concept that I think was called "capture." It has something to do with foxes subverting regulation of the henhouse to the service of the reynardine agenda.

This is the part of the story of SOX that is sadly neglected by the academic critiques of the legislation.

The huge up-front costs of compliance with Section 404 were clearly not what Congress had in mind. Let's be completely clear about what happened: the Big Four accounting firms abused their market power, creating a regime that would provide a new revenue stream to replace the then-rapidly dissipating revenue stream from the sale of abusive corporate tax shelters.

Now that SOX 404-compliant controls are in place at nearly all reporting corporations, and require only annual maintenance and reporting, the Big Four have, miraculously, found a new way to vacuum huge sums of money from the pockets of their clients: the new financial accounting rules on reporting and disclosure of uncertain tax provisions (FASB Interpretation 48).

What will miraculously arrive on the scene after corporate taxpayers get their arms around FIN 48? Hard to say. But in the words of the distinguished corporate law scholar, Prof. Roseanne Roseannadanna, "It's always something." The only long-term answer is to blow open the accounting oligopoly.

Posted by: burnspbesq | Dec 3, 2006 12:38:09 AM

Romano's major thesis was about the process by which the law was made - if the statute works, it's an accident.

Much of SOX is silly, useless law or silly, incomprehensible law, or silly, make work law. The machinations that go into shoehorning non-financial experts into "audit committee financial experts" is a good example. Again, the point is that SOX is not a systematic overhaul of governance, but a scatter shot set of rules directed at particular Enron or WorldCom pathologies.

As to Section 404, I don't think many companies had principled objections to a requirement that management provide information on the robustness of internal controls. It was the recoupment of lost audit fees through the attest process that got a lot of people upset. One of our directors kept pointing out that if you go into the legislative history it was clear in the committee reports that Congress didn't realize how much the attest was going to cost (there is a reference to it being included in the normal audit fee). And it wouldn't shock me that the system having been put in place, and companies now used to reviewing their internal controls, that there is some perceived utility, and changing things now will be as costly as instituting them in the first place. (Kind of like police department post-Miranda realizing that there was a kind of professionalism in reading the rights.)

But that doesn't take away from the fact that (a) its passage was the equivalent of a legislative panic attack; and (b) there are lots of sections of SOX, and the regs issued thereunder, that are dumb.

Posted by: Jeff Lipshaw | Dec 2, 2006 1:39:14 PM

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