Regulatory overreaction to the ‘Enron’ effect

Two years ago, a U.S. Republican Congress and a Republican president enacted the most far-reaching new regulatory controls on America’s businesses since the 1930s, says Bruce Bartlett.

They were reacting to Enron and other corporate scandals. But rather than carefully studying the issue first, both rushed to do "something" by enacting the Sarbanes-Oxley Act (named for Senator. Paul Sarbanes, Maryland Democrat, and Rep. Michael Oxley, Ohio Republican) in record time.

The most onerous provision of the Sarbanes-Oxley legislation is section 404, requiring extensive new internal controls for financial reporting. A recent study by industry group Financial Executives International found:

  • The average compliance cost for large companies was $4.6 million, involving 35,000 hours of internal manpower, $1.3 million on external consulting and software, and additional audit fees of $1.5 million.

  • On May 19, Maurice Greenberg, chairman of AIG, the world's largest insurance company, told shareholders Sarbanes-Oxley was costing them $300 million yearly; General Electric recently said it was paying $30 million per year in compliance costs.

  • According to a new study by the law firm Foley & Lardner, the average cost for being a public company with sales of less than $1 billion increased $1.6 million last year due to Sarbanes-Oxley.

    There was also an unquantifiable loss of productivity because senior executives must spend so much time dealing with the law's requirements, says Bartlett.

    It's hard to specify the effect of Sarbanes-Oxley on the economy, but some economists suggest it may be behind the slow growth in investment and hiring. As The Washington Post's columnist David Ignatius said March 9, Sarbanes-Oxley has "added to the wariness of CEOs" and "reduced the job-creating dynamism of the economy."

    Source: Bruce Bartlett, “Regulatory overreaction,” May 24, 2004

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    For more on Burden of Regulations

    FMF Policy Bulletin/25 May 2004
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