Mike Oxley, RIP – Now For His Legacy…?

           “De mortuis, nil nisi bonum”

 As the bells of celebration were ringing in the New Year, they also tolled for Michael G. Oxley, retired Republican congressman from Ohio (1944-2016).

No news story failed to open with Oxley’s signature legislative accomplishment -- his co-sponsorship with now-retired Senator Paul Sarbanes (D-Md) of the 2002 law that bore their names and up-ended the regulation of public company audits and the auditing profession in the United States.

But for that bill – rushed to passage in the over-heated atmosphere of financial scandal known for short as Enron/WorldCom – Oxley’s extended career as a genial and modestly accomplished back-bencher would have been little remarked. With it, a re-visiting is possible of my observation in the International Herald Tribune on July 20, 2002, about the preliminary Senate vote, that “any legislation receiving the bipartisan margin of 97-0 is bound to be fundamentally defective.”

Those with interests to be served in preserving the status quo of Big Audit have been predictably bright and sunny. As SEC chairman Mary Jo White asserted on December 9, 2015, keynoting the AICPA’s annual national conference, “investor confidence in audited financial statements and independent auditors is high…. attributable, at least in part, to improvements in audit quality….”

Among those less sanguine about the persistence of the “expectations gap” would be the investors in the cascade of companies falling into disaster after the passage of Sarbanes/Oxley. They have reprised the question, “Where were the auditors?” as the list has lengthened since the debacle of 2007-2008 -- from Bear Stearns and Lehman Brothers, AIG and Fannie Mae, right down to Valeant and Martin Shkreli.

These and the many similar examples shape an understandable skepticism at the absence of convincing causation-based evidence that the American environment for reporting and auditing has been improved by Sarbanes/Oxley. And there are other grounds for doubt -- the following being tentative and incomplete:

• Start with the absence of a prosecutorial track record under the law’s new signing obligations for company officers and auditors – practical confirmation that these were hastily designed redundancies engrafted on the existing legal requirements of the core American securities laws of 1933 and 1934.

• The ability to conclude that Sarbanes/Oxley was no more than a one-off politically-motivated spasm by which the law-makers defaulted to “motion feigning as progress” is reinforced by the absence of discernible impact of the populist-oriented rhetoric from Occupy Wall Street through Elizabeth Warren to Bernie Sanders, and the lobbying-based bottle-necking of the rules by which to implement the Dodd-Frank legislation of 2010.

• Other concerns are found in the staff rooms of the large accounting firms – where straw polling among the generation of young auditors reveals deep dismay about the twin pressures of time-and-budget driven performance, and processes designed primarily to satisfy the hostile check-lists of the inspectors from the Public Company Accounting Oversight Board.

• Further, of concern to those staffers’ superiors in the ranks of the large firm partners, is the existential question whether audit quality has been improved or degraded by Sarbanes/Oxley’s injection of federal agency control over both auditing standards and quality review, and its constricting prohibitions on the scope of services permissible for audit clients.

Scholars of the human tendency to tell over-simplifying stories about complex events would caution that the supporters of Sarbanes/Oxley -- who optimistically ask, “Is the state of reporting and auditing better today than in 2002?” -- are asking the wrong question.

The more rigorous concern – therefore less appealing, and more readily denied or avoided – is this: “How would present conditions compare, if other strategies had been followed in 2002 – including, importantly, doing nothing at all but instead allowing the system to go through the inevitable period of cathartic cleansing that is part of every cycle in the financial markets?”  

That is – while Sarbanes/Oxley has plainly not achieved the Herculean task of hosing out the financial stables, neither are those edifices of capitalism equipped with self-cleansers. Rather, both periodic out-breaks of financial chicanery and the recurring resort to ineffective hindsight “solutions” are as embedded and as inevitable as the cyclical fluctuations in the world’s economies themselves.

Just so, it is a predictable certainty that the next generation of white-collar manipulators are evolving toward maturity even today – and that their unscheduled future break-outs will both surprise and evade the best efforts of earnest if out-witted gate-keepers – the SEC and the PCAOB, and Washington legislators as well.

Those would have included the well-intentioned Mike Oxley himself. All will speak well of him. But Shakespeare’s Mark Anthony expressed the darker view, at the funeral for Julius Caesar, that “the good is oft interred with their bones.”

That oration also provided a lasting reminder: even the Sarbanes/Oxley law is over-ridden by the law of unintended consequences, and “the evil that men do lives after them….”

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