Regulation versus Wealth

By Douglas Kohn

Kohn@Fordham.edu

For all the talk of implementing new regulations to tame finance, there are still elements of necessary deregulation that are being overlooked by the Federal Government.

The rules used to say that no one could get a mortgage unless they were able to pay 20% down on their home. This made sense, as the social consequences of having to later kick someone out of their home are more damaging than having large numbers of people not own their own home in the first place. This would still be considered “light touch” regulation.

America simply should restore the old regulation regime but consider deregulating in other areas. One of the most overlooked problems in America today is what the CPA Journal called “The Chilling Effect of Sarbanes-Oxley.” Sarbanes Oxley was passed (as usual, in a panic, with nobody reading all of the bill) in 2002 in response to the unusually large series of corporate scandals that came to light in the previous downturn. Included in these were Enron, Worldcom, Tyco and Arthur Andersen.

Arthur Andersen’s main role in that crisis was to be Enron’s auditor. This means they were an independent body hired by Enron to make sure the company’s books were clear of errors and to discover any possible fraud. As they did not do this correctly through both negligence and corruption, there was a crisis of confidence in the system. In response Sarbanes Oxley was passed to tighten auditing rules. An example of a new regulation was that CEOs had to sign off on the company’s financial statements and on the findings of their independent auditors.

The aforementioned regulation is not one of the more damaging ones, but the climate created by Sarbanes Oxley has made it grossly expensive for medium sized firms to go public on the stock market. The average cost of an Initial Public Offering (IPO) has reached $750,000. The result of this is that many American companies now find it easier (and cheaper) to bring their public offerings overseas, notably on the London Stock Exchange but to others as well.

Reform of Sarbanes Oxley is urgently needed to keep America’s medium sized firms competitive and able to raise money on the stock exchange for growth.