Sarbanes-Oxley: Legislating in Haste, Repenting in Leisure

Abstract

This essay was prepared for presentation as a lecture to the Hoover Institution. In it, I focus on three areas in which the Public Company Accounting Reform and Investor Protection Act, popularly known as the Sarbanes-Oxley Act (SOX), has proven especially problematic. First, the legal ethics rules added to the Act at the last minute have proven incapable of dealing with the incentives that condition lawyers to turn a blind eye to client misconduct. Second, the structure Congress chose for the Public Company Accounting Oversight Board (PCAOB), the accounting oversight board created by SOX, turns out to have serious constitutional defects. Finally, and most importantly, corporate compliance costs have gone up far more than anyone anticipated and are staying up far longer than even Cassandra might have predicted. Worse yet, these costs disproportionately impact smaller public corporations, which are an important engine of economic growth. Taken together, these three areas of concern highlight why Congress should think twice before trying instant legislation in the future.

Keywords: Sarbanes-Oxley, corporate governance, securities regulation

JEL Classification: K22