Ron Paul: Best
friend to small businesses seeking relief from the costly effects
of Sarbanes Oxley regulations and to the workers who will be caught
in the crossfire.
companies have had to comply with a very costly Federal regulation
titled The Sarbanes-Oxley Act of 2002. Sarbanes-Oxley (or
Sarbox) is a controversial law passed in response to a number
of corporate accounting scandals including Enron and WorldCom.
The legislation is wide ranging and contains 11 sections ranging
from Corporate Board responsibilities to criminal penalties.
The Act also
covers issues such as audits by independent auditors, corporate
governance, internal control assessment, and enhanced financial
disclosure. Companies spent an average of 4.36 million each
adhering to Sarbox in 2004, the first year in which compliance with
the law’s audit rules were required (even that number is contested,
study puts the figure at $5.1 million per company). It
should come as no surprise that the Securities and Exchange Commission
(SEC) that was pushing for the Act had estimated
that companies would only spend $91,000 per year: a slight
discrepancy with the actual figures. The bill passed the House
by a vote
of 423-3 and the Senate by 99-0. Can you guess which friend
of the small businessman was one of the three who voted against
it? Ron Paul.
a statement to the House, explained that interference from Congress
through de-valuing the dollar with the help of the Federal Reserve
led to false boom cycles that fooled investors. The easy credit
environment made it possible for Enron to secure hundreds of millions
in uncollateralized loans. He also explained that the SEC already
has numerous rules with which corporations must comply. In a truly
free market, investors understand that investments carry risks and
will research a company on their own. However, in a highly regulated
society the investor is lulled into a false sense of security: as
long as the company is complying with SEC regulations, they must
be okay, right? He stated:
"In our heavily regulated economy, however, investors and analysts
equate SEC compliance with reputability. The more we look to the
government to protect us from investment mistakes, the less competition
there is for truly independent evaluations of investment risk."
Additionally, Enron was able to secure large sums of corporate welfare
due to lobbying efforts that cost taxpayers unnecessary additional
losses. To prevent such heinous fraud from occurring in the future,
the American people need less regulation, not more. We should not
punish innocent companies, he
remarked, but "[i]nstead, we should focus on repealing
those monetary and fiscal policies that distort the market and allow
the politically powerful to enrich themselves at the expense of
the American taxpayer."
most contentious aspect of Sarbox is Section 404, which requires
management and the external auditor to report on the adequacy of
the company’s internal control over financial reporting. This is
the most costly aspect of the legislation for companies to implement,
as documenting and testing important financial manual and automated
controls requires enormous effort. From an economic perspective,
individual investors are hit hard: They may be able to
diversify their investments, but since each company must spend significant
amounts of money and resources on Sarbox compliance, this
cost cannot be diversified, but is instead multiplied for each
to Capitalism Magazine’s Alex Epstein, “Sarbanes-Oxley
is a fundamentally corrupt law that must be repealed.” The
costs arise because instead of going after crooks and prosecuting
them, this Act forces all businessmen to prove to the government
that they are not “cooking their books.” We seem to have lost
the "innocent until proven guilty" concept. Moreover,
the Act holds a businessman criminally liable for any
mistake in a financial report if the government can prove the mistake
was made knowingly. Mr.
Epstein further explains: One study documents businesses engaging
in practices like “requiring an auditor to attend a meeting to prove
it took place” and “proving that all of the physical keys to an
office in Europe have been accounted for since it opened in 1995″!
“Even a completely harmless error that nobody cares about,” …
“takes up hundreds and hundreds of hours of the auditors, the CEO,
the CFO and the audit committee.” As put by another
writer: "In its four years, Sarbox has damaged the American
economy as badly as a group of unsupervised four-year-olds would
damage a playroom."
was Congressional fiddling that led to the circumstances that set
up the Enron scandal in the first place. Congress could not let
businesses alone and set up pay ceilings and other regulations that
led to end-runs on those impositions. Innovative businesses began
to find other ways to pay their top executives and created
an atmosphere of duplicity between partners and accounting firms.
As a result
of the draconian provisions of Sarbox, the number of American companies
deregistering from public stock exchanges nearly tripled
during the year after Sarbanes-Oxley became law, while the New York
Stock Exchange had only 10 new foreign listings in all of 2004.
Novak, in his column of April 7, 2005, said that, “[f]or more
than a year, CEOs and CFOs have been telling me that 404 is a costly
nightmare" and "ask nearly any business executive to name
the biggest menace facing corporate America, and the answer is apt
to be number 404…a dagger aimed at the heart of the economy."
September 12, 2006, a group of organizations in the biotechnology,
electronics, health, and medical-device industries issued a call
for reforming Sarbox. These companies are what drive our innovation
and growth in this country. Without them the economy will suffer
of you familiar with Ron Paul, it should come as no surprise that
on April 14, 2005 he introduced the Due Process and Economic Competitiveness
Restoration Act, which would have repealed Section 404 of Sarbox.
For those of you familiar with Congress, it should come as no surprise
that this bill did not pass. I suggest that you read Dr. Paul’s
short introduction of his bill in its entirety.
It is well reasoned and addresses the damage this bill does to society.
He perceptively writes: “Laws criminalizing honest mistakes done
with no intent to defraud are more typical of police states than
on April 24, 2007, the Senate once again rejected any attempt to
loosen the requirements of Section 404 for small businesses.
The cost of complying with 404 impacts
smaller companies disproportionally, as there is a significant
fixed cost involved in completing the assessment. By a 62-35
vote, the Senate set
aside an amendment that would make compliance with section 404
optional for companies with a total market value of less than $700
did not need a new law. There were already plenty of laws in place
that outlaw fraud. The Enron trials were based
on statutes that had nothing to do with Sarbox and they were
found guilty. Here is one
example of a plea agreement that did not rely on Sarbox. The
system worked. The bad guys went to jail. Nevertheless, Congress
felt that it had to do something, and that something was to overreact.
As usual, Congressional
continual overreaction will have significant effects on the American
economy. Thanks in large part to Sarbox and its financial costs
and threats of criminal penalties, there is now a
massive move toward privatization of major U.S. Corporations
and is potentially the most “profound
economic shift in the U.S. in the last ten years.”
Those at the top, the investment bankers, the executives and hedge
fund investors will do quite well from this new corporate structure.
The money however, will come with the price of significant reductions
in benefits for employees. Pension
funds may be reduced, health benefits will almost certainly be reduced,
and layers of management will be trimmed. Thus the implication
of privatizing all of these companies will be devastating for the
As Paul Craig
"By making top executives criminally liable for material errors,
regardless of whether fraud is intended, Sarbanes-Oxley violates
two protective principles of our legal system: mens rea (no crime
without intent) and actus rea (evidence of a criminal act). Violating
these legal principles is a far greater offense than accounting
On July 18,
Paul did an interview with Audit Trail and laid out his views
on the subject nearly five years to the day that Sarbox was passed.
Ron Paul stated:
inflicted on American businesses and capital markets by Sarbanes-Oxley
has strengthened my conviction that this legislation should be
repealed. In 2000, nine of every ten dollars raised by foreign
companies were raised in the United States. In 2005, nine of the
ten largest offerings were not registered in the United States,
and, of the largest twenty-five global offerings, only one took
place in the US. The number of public companies going private
increased from 143 in 2001 to 245 in 2004. Sarbanes-Oxley is a,
if not the, major reason companies are fleeing America's capital
markets. Furthermore, according to some estimates, Sarbanes-Oxley
has cost the very investors the law claims to protect at least
$1.4 trillion. How could anyone regret voting against such a harmful
He is most
surprised that a consensus remains with both parties that Sarbox
is heralded as a great achievement even though it was poorly drafted
and small businesses need relief from the unintended consequences
(blowback if you will) of the law. He concludes that “Reform,
or even repeal, of Sarbanes-Oxley remains one of my top priorities.”
blowback will be hurting Americans. This time the attack comes
from a hastily passed bill that was intended to help consumers and
instead has had a devastating effect on the economy and we are not
finished feeling its effects yet. When will the Federal Government
learn that as a group, they can barely take care of their own affairs,
let alone determine how best to manage every business in the country?
Time after time we see laws passed in response to one problem only
to create another, worse situation. Nor does Congress ever
do anything small in reaction to a big fraud or an attack; they
must grandstand and make as much of a mess of the entire economic
system as possible. That is to say, nearly all members
of Congress; with the exception of a very rare few who have studied
and understand economics, such as Ron Paul.
Ron Paul reads
complex economic bills and understands all the consequences
that will come from their passage: the intended and unintended.
He continually voices his dissent in a lonely room. Yet, time after
time he is proven right. He was right when he voted against going
to war in Iraq, he was right about the dangers of the loss of our
liberties from the Patriot Act, and he was right about the effect
on the economy of the Sarbanes-Oxley Act. Even when the evidence
of the contrary is right in front of their faces, Congress is still
itself on the back for passing Sarbox.
Is it any wonder
why his supporters are so passionate about Ron Paul becoming President?
Haman [send her mail] is
a 44-year-old attorney. She grew up in NYC, dropped out of high
school, and then moved to Las Vegas to become a croupier in craps
working at the Desert Inn for seven years. She obtained a GED and
later attended Arizona State University receiving numerous awards
and graduating Summa Cum Laude in 1996. She then went on to attend
and graduate from Harvard Law in 1999. She is licensed in both CA
and AZ. She practiced complex civil litigation and appellate work
for 6 years. She is currently on sabbatical, living with her husband
Adam in Mesa, Arizona.