Is Sarbanes-Oxley Act just expensive nuisances?

Read a news alert today and realized that a group of U.S. executives and academics plans to do something to revise portions of the Sarbanes-Oxley Act (“SOX”). They formed a committee called The Committee on Capital Markets Regulation, led by former White House Economic Adviser Glenn Hubbard and former Goldman Sachs President John Thornton. This group is also backed by Henry Paulson, the U.S. Treasury Secretary.

Sarbanes-Oxley Act was passed in 2002 after accounting scandals triggered the collapses of Enron Corp. and WorldCom Inc., and the demise of Andersen. It was established in the same year when AA Hong Kong and China merged with PwC. That was also when I started to go to work at Cheung Kong Centre and Lantau Island and stopped going to Landmark and Whampoa Garden.

SOX has been in place for four years and its purpose is to improve Corporate Governance and internal controls of listed companies. Section 404 of SOX requires management of listed companies to perform assessment and testing on the internal controls over financial reporting. It also requires auditors to audit the assessment and testing to express an opinion. Auditors have more work to do but audit fee increased quite significantly in the first year of adoption.

Executives and auditors of accelerated filers has been certifying the internal controls over financial reporting since fiscal year ends on or after November 15, 2004. According to the news alert, the Business Roundtable, which is an association of chief executive officers of leading U.S. stock market led by Harold McGraw III, said that 40% of its members will pay more than US$10 million each this year to comply with SOX. Another research firm estimated that U.S. Companies will spend a combined of US$6 billion this year to comply. Without doubt, this is good news to me and my friends from PwC and Protiviti.

However, SOX does deteriorate the competitiveness of U.S. stock market. In 2001, the U.S. accounted for 35 percent of all IPO but up to last year, it was down to 20 percent of all IPOs. And worse, the top 10 stock offerings did not list in the U.S. A few of my old U.S. listed clients even thought about delisting their securities from the SEC in order to reduce cost. Is the complexity of regulations seen as a boost of good corporate governance or a threat to the expansion of the U.S. economy?