Sarbanes-Oxley: Progressive Punishment for Regressive Victimization
35 Pages Posted: 9 Apr 2007
The Sarbanes-Oxley Act of 2002 materialized under circumstances that forced Congress to rush to the aid of the American public. Spectacular business failures resulted from accounting scandals and fraud at numerous large and well-regarded companies. U.S. market values declined tremendously. Each new day brought new fraud, job cuts, worthless pension funds, and a louder cry for a strong legislative solution. Close watch by the American public in the run up to the midterm congressional elections invariably forced emergency legislation. Finally, in July 2002, on the coattails of more than a 30% drop in total market value, Congress enacted Sarbanes-Oxley.
Determined to deliver a swift legislative response, Congress imposed new obligations on executives, directors, accountants, lawyers, and numerous other entities, but gave little consideration to the Act's possibly adverse effects. A result of its circumstances, Sarbanes-Oxley put forth numerous provisions targeting existing governance and financial reporting weaknesses. The Act purported "[t]o protect investors by improving the accuracy and reliability of corporate disclosures." Its provisions addressed numerous conflicts of interest, mandated director independence, channeled supervisory responsibilities to the most disinterested parties, improved the dissemination and disclosure of material financial and organizational information, and sought to deter future fraud with stiffer criminal sanctions and greater senior executive responsibility. These mandates, though well suited for safeguarding against exposed weaknesses, completely ignored the differences between large and small companies.
This Comment addresses the disproportionate burden Sarbanes-Oxley places on small public companies. The Comment examines the key events and circumstances surrounding and influencing the Act's enactment. The Comment then dissects Sarbanes-Oxley, presenting evidence that numerous provisions are disproportionately burdensome on small public companies. Furthermore, the Comment analyzes several recently recommended changes aimed at decreasing compliance costs for small public companies and encouraging their participation in the public markets. The Comment suggests that the market is well prepared to handle corporate fraud, concluding that Sarbanes-Oxley is an overinclusive regulation punishing smaller firms for their association in the "business" club. Overall, this Comment aims to demonstrate that Sarbanes-Oxley was a direct response to the overwhelming drop in investor confidence due to fraud among the largest U.S. public corporations and suggests that only very large public companies wield substantial market capital to affect the markets in the same way as Enron and WorldCom. Therefore, applying the most burdensome Sarbanes-Oxley provisions, especially the Act's section 404, only to public corporations whose fraud has devastating potential would protect investors and improve small-firm competitiveness in the public markets without seriously threatening investor confidence.
Keywords: Sarbanes, Oxley, Sarbanes-Oxley, section 404
Suggested Citation: Suggested Citation