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Richard Rahn on "destructive government": the cost of Sarbanes-Oxley
-------- Original Message --------
Subject: Richard Rahn's "Destructive Government" (The Washington Times)
Date: Thu, 16 Jun 2005 08:01:14 EDT
From: Richard Rahn
The Washington Times
By Richard W. Rahn
Published June 16, 2005
The basic function of government is to protect person and property, but all
too often government does just the opposite. In their zeal to protect us
financial fraud, government officials recently engaged in a series of
that have cost tens of thousands of innocent people their jobs, reduced
international competitiveness, and destroyed more than $1 trillion in
Every American now suffers from the excesses of certain prosecutors and
judges, and from Congress' tendency to pass legislation aimed at
they perceive as problems without thinking through the consequences of
actions. In the wake of the Enron scandal, the government went after
auditor, Arthur Andersen, and destroyed the company. The Supreme Court
overturned the conviction of Arthur Andersen. The government's
attack on the company cost 28,000 innocent people their jobs and made the
auditing business less competitive, which has substantially increased
for every U.S. company. That, in turn, hurts their employees, suppliers and
New York Attorney General Elliott Spitzer has just suffered a defeat at the
hands of a jury for trying to convict a stockbroker for noncriminal
Mr. Spitzer has used intimidation against a number of companies,
with actions that may not even be crimes. In essence, he "blackmails"
paying large settlements under the threat of destroying their business
Andersen), though they may be innocent of any wrongdoing. These unfairly
induced, forced settlements are costly to innocent stockholders and
The Securities and Exchange Commission (SEC) and other government agencies
routinely penalize companies for wrongdoing, even if only a few executives
engaged in illegal practices. In many such cases, the shareholders were
of the fraud, yet government fines further increase the shareholders' loss.
This makes as much sense as if you called the police because your home
robbed, then the government fined you because a robber came into your
SEC Commissioner Paul Atkins has tried to stop this despicable practice,
with the impending appointment of Chris Cox as SEC chairman, he may now
the votes to do so.
The most outrageous example of the government punishing everyone for the
frauds of a few bad apples was passage of the Sarbanes-Oxley Act. Peter
former U.S. Treasury general counsel and now an American Enterprise
resident fellow, has just published a study in which he documents the
costliness of the Sarbanes-Oxley Act, with almost no discernible
benefit. As Mr.
Wallison correctly notes, the existing statutes against fraud and the
laws already adequately protect us from those who engage in fraud.
Sarbanes-Oxley (SOX) is a costly and misguided attempt to prevent people
committing fraud from doing so by substantially increasing regulation of
companies. But given there are an almost unlimited numbers of ways to
fraud, if one is intent on doing so, efforts to regulate the attempt
SOX is a poster child for a government act whose cures are worse than the
disease. Its provisions are so costly one section of the bill alone has an
average company cost of $4.36 million, and the regulated companies will
have to pay
$6.1 billion this year alone to comply with SOX. To ensure companies comply
with the regulations, the four large accounting firms that do almost all
company audits have raised their fees an average of 78 percent to 134
Professor Ivy Xiying Zhang of the University of Rochester has calculated
has resulted in a cumulative loss of $1.4 trillion for the shareholders of
public companies. (This works out to an average loss of about $460 for
woman and child in the United States).
Mr. Wallison goes on to demonstrate there are few discernible and
quantifiable benefits to the legislation. It is also unlikely many major
scandals would have been stopped if the legislation had been in effect;
they been, their cumulative costs were only a small fraction of the
costs of the
so-called corrective legislation SOX.
Government officials are all too slow to admit and correct their
laws, regulations and actions. What we need is legislation that gives
citizens, associations and businesses the right to contest in court laws
regulations that do not meet a reasonable cost-benefit test. Only then
excess and abuse be brought under control.
Richard W. Rahn is a senior fellow of the Discovery Institute and an
scholar of the Cato Institute.
Posted by Declan McCullagh on Jun 16, 2005
in category economics
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