Little Bits of History

Follow the Money

Posted in History by patriciahysell on July 30, 2013
Paul Sarbanes and Michael G. Oxley

Paul Sarbanes and Michael G. Oxley

July 30, 2002: The Sarbanes-Oxley Act is signed into law by President George W. Bush. Senator Paul Sarbanes, a Democrat from Maryland, and Representative Michael G. Oxley, a Republican from Ohio, co-sponsored the bill. The bill passed the House with a vote of 423-3 and the Senate with a vote of 99-0. The law established new or enhanced standards of US public company boards, management, and public accounting firms. It contains 11 titles or sections and does not apply to private companies. Being a public company means it is registered on the stock exchange, i.e. public.

At the beginning of the millennium, there were many highly publicized business irregularities. Enron, WorldCom, Tyco, Adelphia, and Peregrine Systems showed the nation and the world the sleazy side of business in a big way. The boardroom failures, auditor conflicts of interest, the securities industry’s conflict of interest, irregular banking practices, bursting the Internet bubble, and obscene executive compensation lost billions of investor dollars both at home and abroad.

The law established an oversight board with nine different sections specifying what to oversee. Auditor independence and corporate responsibilities were spelled out. Enhanced financial disclosures were defined, including off-balance-sheet transactions. Analyst conflicts of interest were addressed to help restore investor confidence. The commission’s resources and authority along with studies and reports were delineated. Corporate and criminal fraud and white collar crime were addressed with penalties increased for infractions. Corporate tax returns and accountability were defined and penalties made explicit.

Proponents claim the law was sorely needed and has helped to restore investor dollars to the markets. Detractors say that the costs of compliance reached $5.1 million per Fortune 500 company in 2004 alone. They claim the regulations stifle creativity, especially in small startup companies in the technology sector. Other countries, including Canada, Japan, Australia, France, Italy, and South Africa have similar laws on the books with amounts of strictures and penalties involved for corporate malfeasance spelled out.

“Morale is faith in the man at the top.” – Albert S. Johnstone

“All men’s gains are the fruit of venturing.” – Herodotus

“The morale of an organization is not built from the bottom up; it filters from the top down.” – Peter B. Kyne

“If you can build a business up big enough, it’s respectable.” – Will Rogers

This article first appeared at Examiner.com in 2009. Editor’s update: The Sarbanes-Oxley Act does create costs for business. However Finance Executives International has been monitoring these costs. In 2007, they looked at 168 companies with average revenues of $4.7 billion. The cost of compliance for each was on average $1.7 million or (0.036% of revenue). These costs have continued to decrease. However, when asked if the price of compliance has saved more than the cost of compliance, less than a quarter of those polled agreed. Those who believe the Act has helped cite the increasing cross-listing in foreign firms has taken place compared against those not under the auspices of this Act. Another concern, however, has been the shift of business from New York to London in order to escape the compliance costs.

Also on this day: Where Did He Go? – In 1975, Jimmy Hoffa disappears.
Exterminated – In 2003, the last old style Volkswagen Beetle rolls off the assembly line.
House of Burgesses – In 1619, the legislative body first convened.

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