SANITY COMES TO SARBANES by Michael S. Malone

After nearly a decade of doing everything it can destroy the creation of new high tech companies, Congress finally does something right . . .and the whining has already begun.

This week, by a vote of 37-32, the House Financial Services Committee voted to amend the Sarbanes-Oxley Act to permanently exempt companies valued at less than $75 million from the audit portion of that law.  The bipartisan sponsors of the bill were two Congressmen:  John Adler (D) and Scott Garrett (R), both from New Jersey. 

Apparently, in what may be the first actual support of small business creation in America in its year in office, the amendment was also backed by the White House, in particular chief of state Rahm Emanuel.  It seems that the Obama administration has finally begun to realize that you can’t create jobs at the same time that you are strangling the job creators.

Kudos to them all.  As anyone who has read this column for any length of time (or my editorials in the Wall Street Journal) knows, I am a sworn enemy of Sarbanes-Oxley – not because its motives are wrong, but because it stands as a classic example of using a legislative meat-axe when a scalpel was required.  Since it was passed in 2003, by my estimate, S-Ox has cost American industry just short of one-quarter trillion dollars . . .money that one might imagine American companies could use right about now. 

But that loss, to my mind, is far less than the damage done to the high tech industry – the single greatest source of new jobs, new innovation, and economic health we have – by the loss of two generations of new companies that were unborn, died early from lack of funding, or were swallowed up by big companies because they couldn’t Go Public with stock.  Indeed, in the years since S-Ox passed, there have been almost no high tech IPOs, compared to hundreds in the decade before.  All thanks, in large part, to Sarbanes-Oxley.

It’s easy to appreciate why Sarbanes-Oxley was passed, but much harder to understand (beyond bureaucratic inertia, of course) why such a destructive law – one that has accomplished little of what it set out to do, while simultaneously destroying new wealth creation, reducing national competitiveness, and furthering the gap between the haves and have-nots in America – has continued to stay on the books.  Or why it still has defenders.

A little background:  Sarbanes-Oxley was passed in the wake of the collapse of the dot.com bubble in 2000.  These days we’ve become pretty used to fast-moving, technology-aided economic bubbles, but back then this was something new and unsettling.  A lot of speculators (including millions of everyday folks) had thought they’d become rich in the late-1990s . . .only to see those dreams dashed when it all crashed in the first months of the new century.

This, of course, led to both anger and dark mutterings about criminal behavior – the latter seemingly proven when the scandals broke over Enron, Worldcom and other corporate Ponzi schemes.  Combine that with the sudden implosion and death of thousands of dot.com companies, taking billions of wealth with them, and it seemed that the entire tech industry was just one big criminal conspiracy – and the evil-doers had to be reined in by government . . .and punished.

Thus, Sarbanes-Oxley, of which the two most important parts were:  a) that corporate officers sign off on the integrity of their company’s internal financial controls; and b) the company pays for an outside audit of (a).   The first requirement seemed benign enough – until company directors realized that their personal assets would be vulnerable to the damages done by some unknown employee deep in the bowels of the company committing fraud or absconding with company funds.  That led to an exodus of some of the wisest and most veteran talent in high tech from the corporate boards when their expertise might have done the most good.   In other words, just when they needed to get smarter to compete in the global marketplace, US companies got dumber.