Sarbanes-Oxley Debacle
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AEI Online (Washington) Publication Date: May 26, 2006 The Sarbanes-Oxley Debacle: What We've Learned; How to Fix It By Henry N. Butler and Larry E. Ribstein AEI Press, 2006, $25 In The Sarbanes-Oxley Debacle: What We've Learned; How to Fix It (AEI Press, 2006), Henry N. Butler and Larry E. Ribstein argue that the Sarbanes-Oxley Act of 2002 (SOX) has been a colossal failure. Enacted after the collapse of the Enron Corporation, the authors argue that Congress panicked and rushed into passing legislation that has had huge direct and indirect costs to the firms which must comply with the reporting rules. The direct cost to companies complying with SOX's reporting rules has been widely estimated at $6 billion per year. Butler and Ribstein, however, argue that the indirect costs of SOX are in fact far greater: diversion of executives' attention from maximizing shareholder value; increased risk aversion by managers; distortion of executives' and directors' incentives and investment decisions; criminalization of corporate agency costs and mistakes; reduction of access to capital markets by entrepreneurs; and the crippling of the dynamic federalism that has created the best corporate governance structure in the world. Indeed, the best evidence to date indicates SOX imposes additional net losses totaling $1.1 trillion to the financial markets. Although SOX should be completely overturned, according to Butler and Ribstein, it is more likely to be amended by Congress, particularly if a pending legal challenge to the act succeeds. In The Sarbanes-Oxley Debacle, the authors propose the following changes: prohibit private lawsuits, thereby defusing a litigation time bomb; exempt dual-listed securities of foreign corporations; exempt all but the largest corporations; allow shareholders to opt out of reporting requirements and take the risk of having fraud or errors; and remove the criminal sanctions in SOX. Butler and Ribstein write, "SOX's attempt to create a perfect world with zero fraud goes too far. Moreover, it is well-accepted in the financial economics literature that the costs and benefits of securities regulation should be evaluated from the perspective of the typical shareholders who can avoid some costs of fraud by investing in diversified portfolios of shares. By imposing the costs of eliminating fraud on all firms in investors' portfolios, the SOX mandates are a terrible deal for the ordinary investors it purports to protect." Henry N. Butler is the James Farley Professor of Economics, Argyros School of Business and Economics, Chapman University, and director of the Judicial Education Program at the AEI-Brookings Joint Center for Regulatory Studies. Larry E. Ribstein is the Richard and Marie Corman Professor of Law, University of Illinois College of Law. ### Related Links The Sarbanes-Oxley Debacle More Press Releases Media Inquiries: Veronique Rodman American Enterprise Institute 1150 Seventeenth Street, N.W. Washington, DC 20036 Phone: 202-862-4870 E-mail: VRodman@aei.org
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