At least one piece of the Dodd-Frank legislation now has a ribbon neatly tied around it: the Securities and Exchange Commission has issued its rules to exempt small companies – generally those with less than $75 million of common equity – from having a separate independent auditor’s report on their internal control assurance under Section 404 of the Sarbanes-Oxley law.
customarily concise and lucid summary, see Edith Orenstein’s FEI
I’ve been quiet on Dodd-Frank. Why not? Unmanageable in its creation, incomprehensible in its enactment, unpredictable in its consequences, as it was. Who could work up an appetite to ingest such a pigs’-breakfast of law-making?
Small companies may
say, with the night watch in Hamlet’s Elsinore, “For this relief much thanks.”
But marginal tinkering with the mis-begotten obligations of Sarbox 404 will
matter less, and for different reasons, than are usually put on view.
To start, the toxic post-Enron environment in which Sarbanes-Oxley was enacted in 2002 has effectively immunized its impositions from critical cost-benefit evaluation. Persistently asking the wrong question – “Has the quality of corporate reporting actually improved since the days of WorldCom and HealthSouth?” – not only ignores the built-in cyclicality by which outbursts of scandal are purged by self-cleansing returns to virtue. It also leaves unasked the proper question: “Is that reporting better than if Washington had done something else – including doing nothing at all?”
can any scarred survivor of the last three years of Bear-Lehman-Fannie-Freddie-AIG-Merrill
– the most disruptive economic period since the Great Depression – argue
seriously that auditors’ reports on the “out-of-controls” of those fallen
industry giants actually made any positive
contribution to systemic safety, stability or credibility?
In that dreary context, of course, it makes perfect rational sense to give small companies a “Get Out Free” card.
That’s because, as
I was advised about parenting strategy when our daughter was born: “Little
kids, little problems; big kids, big problems.” A new father’s worries escalate, from the essentially trivial inconvenience of an infant’s colic or
spilled oatmeal, on to little league injuries and a teenager’s driving safety,
up to college admission and the launch to the challenges of adulthood.
In the same way, the fewer zeroes on a balance sheet, the lessened likelihood of systemic impact of mis-behavior that makes a difference. “Out-of-control” at a Koss or an American Apparel may be inconvenient for a limited constituency, and provide grist for the mill of the plaintiffs’ securities class action lawyers – but otherwise doesn’t matter in the great scheme of things. It’s altogether different when the entire global financial system can seize up under the effects of a threatened, undetected and undeterred collapse at an AIG or a Lehman.
experience teach that regulatory systems designed and applied under motives of
political correctness over the fat part of the compliance curve are wasteful
and ineffective – whether aimed at school truancy, auto emissions or corporate
disclosures. Instead they will fail to identify and address the “outliers” that
actually prove disruptive – the SEC’s sorry performance in regard to Bernie Madoff
Stanford make the case.
Section 404 reports on small companies were never any more likely to be effective by way of detection or deterrence for small companies than they have proved for the large. So it was an inevitability that inflicting Sarbox 404 auditor reports on small companies would have been largely an exercise in even further futility. If regulation has not worked for the big and dangerous, in other words, how can it be good or useful for the small and irrelevant?
Drab as it may
seem, finding negative comfort that at least our legislators have stumbled into
a way to avoid making a weak situation even worse, there is both logic and
benefit in leaving bad enough alone.
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