Criticizing the Critics: Sarbanes Oxley and Quack Corporate Governance

Abstract

Sarbanes-Oxley (SOX) was adopted in a rush, political expediency necessitating that something be done before the 2002 election to minimize voter backlash from the collapse of Enron and WorldCom. Despite the rush, the Act contained a number of improvements on the current state of regulation, including a separation of accounting and consulting services, increase in the strength and independence of the audit committee, certification of financial statements by top officers, and assessment of internal controls by managers and auditors.

Nonetheless, SOX engendered an immediate cascade of criticism, much of the excoriation coming from the Academy, especially those adhering to the view that a corporation was a nexus of contracts. For them, the Act fixed non-existent problems, generated costs that exceeded benefits, and relied on approaches that took no notice of definitive economic data; quack corporate governance in a phrase.

While SOX suffered from uneven craftsmanship and was not fully vetted in the traditional manner, this did not entirely explain the immediacy and strength of the vituperative attacks. Instead, the Act amounted to an affront, indeed a rejection, of the view within the Academy that corporations were a nexus of contracts and that the evolution of corporate law was a race to the top. In fact, SOX appears to have generated improvements in the corporate governance process. As to whether the costs of some provisions outweigh the benefits, definitive empirical data on the subject remains to be developed.