In a December 2008 article titled ‘Washington is killing Silicon Valley’, US author Michael Malone blamed the Sarbanes-Oxley Act 2002 (SOX) for killing entrepreneurism. The op-ed, published by The Wall Street Journal, pointed the finger at SOX for the reduction in initial public offerings (IPOs) in the US since the law was passed.
This is just one of the criticisms voiced against SOX, a law equally admired and disliked, but passed to restore investor confidence after the Enron accounting scandal and which established the oversight of the accounting profession after a century of self-regulation.
The Accountant has had the opportunity to talk this month with the man behind SOX, former congressman Michael Oxley, who at the time chaired the financial services committee of the House of Representatives.
Oxley provided us with an insider’s view of what happened behind the scenes in the US Congress before it passed the law that has changed so much in the global accounting industry. He also took the opportunity to rebuff some of the criticism sparked by SOX, such as the claim that IPOs went down from 269 in 1999 to six in 2008 due to the regulatory burdens imposed by the Act, the accusation levelled by Malone.
Later The Wall Street Journal in a 2012 editorial titled ‘America as number two’, suggested SOX could be one of the reasons why Hong Kong, and not New York was the leading exchange for new stock offerings.
However, as Oxley argues, they were using the "high-water mark" of IPOs that turned into the dot-com speculative bubble of the late 1990s. Oxley said: "Investors lost trillions in market capitalisation after Enron. I asked CEOs who complained about SOX: what was your stock selling for before and after July 30th 2002?"
Beware of the big bad wolfYou will all remember the tale of the three little pigs from your childhood. The first one built his house out of straw because it was the easiest way to do it. Mistake. The big bad wolf huffed and he puffed and he blew the house down. The second little pig built his house out of wood, yet this was not enough protection against the nasty old wolf. Both pigs ended up being eaten, unlike the third one who used bricks for his house.
The fable emphasises that we usually learn the hard way and, in the case of the financial industry, regulations are the bricks that keep our house strong. Indeed, it took the dot-com bubble to burst and the Enron accounting scandal to emerge, just to get some ground rules in place.
Oxley also left this message for the profession: "When I hear complaints I have to remind them that they opposed the Act but ended up making stacks of money, so to the accounting industry I would say just pipe down and do your job." But please don’t shoot the messenger.