A law that's uncooked books

The post-Enron law that holds US firms more accountable has more than paid for the costs of compliance.

Yet another corporate executive fell last week in a US accounting scandal. Gregory Reyes, ex-CEO of Brocade Communications, was found guilty of backdating his stock options. The conviction reveals the renewed intolerance in America for financial fraud ever since the big Enron-type scandals of a few years ago.

Last month, former media mogul Conrad Black was convicted of mail fraud while heading up Hollinger International. Before that, former leaders at Tyco, WorldCom, Adelphia, and Qwest met justice, reflecting in part a more aggressive stance for corporate accountability by the US Justice Department.

But the fact that there are not as many new scandals emerging these days in publicly listed companies can be attributed to a post-Enron law that Congress enacted to tighten the nation's corporate accounting system.

Five years ago this summer, the Sarbanes-Oxley Act, known as SOX, began to calm shaken financial markets and restore faith in American corporate governance by setting more rigorous accounting standards. When President Bush signed the law, he promised that the same ethics would apply for companies as elsewhere in American society. "The honesty you expect in your small businesses, or in your workplaces, in your community or in your home, will be expected and enforced in every corporate suite in this country," he stated.

By most accounts, corporate America is cleaner. Under the law, top executives now are held liable for any mistakes in financial statements they must sign. Board directors are paying more attention to audits and CEO's decisions. Company whistle-blowers can bypass management and take complaints to the board. And audit firms, which once policed themselves, now face scrutiny from a new government body, the Public Company Accounting Oversight Board (PCAOB).

But all has not been easy under SOX. Mid-sized companies have found the cost of compliance can add a big chunk to their expenses. That's led the governing bodies for the law, the Securities and Exchange Commission and the PCAOB, to start easing some accounting restrictions for smaller firms.

One estimate finds the total cost of compliance with SOX has been $26 billion. But compared with the costs to the economy from scandals like Enron's, SOX is an efficient tool of prevention.

Critics also claim SOX's onerous rules have scared away many new companies from listing on US stock exchanges, giving an edge to London as a financial hub. Not so, says a survey released in May that found the market share of the New York Stock Exchange, NASDAQ, and American Stock Exchange rose relative to the market share of the London Stock Exchange from 1998 to 2005. And the survey showed SOX has helped newly listed companies receive a 15 percent premium over companies that list outside the US.

Investors now have more faith in the books of American companies. In the past year, Chinese firms have especially enjoyed the distinction of being listed on US exchanges.

Fortunately, the US Senate shot down an attempt this spring to weaken the law. Honesty can come with a price, and the benefits of honesty are beyond measure.

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