Several years ago, in the wake of Enron and several similar debacles, it was rightfully agreed that we needed to assure more responsible behavior on the part of American corporations. The result was Sarbanes-Oxley, a law that has since been at the center of any number of debates over the difference between “we should do something” and “DO SOMETHING!!!” I’m not an expert on compliance issues, but I’ve heard enough mind-numbing horror stories from enough people in enough places to suspect that a review of the law, as it has been implemented, might be in order.
Now this news, courtesy of John Carney at BusinessInsider.com: the Supreme Court will hear a challenge to SarbOx. As Carney notes, this particular decision by the Court is a little unusual:
The reason the court’s decision to hear the case is so striking is that many of the usual reasons a case makes it to the Supreme Court are absent. There isn’t a split between different courts on the matter. There’s only been one constitutional challenge to the law that rose to the appeals court level, and there the court sided with the trial court by throwing out the complaint. The court’s decision to hear the case suggests that several justices have doubts about its constitutionality.
The challenge to Sarbox could have far more consequences than just abolishing the accounting oversight board or limiting its powers. Perhaps because of the haste with which the law was drafted, it contains no provision upholding the rest of the law if part of it is overturned. This could mean that if the Supreme Court overturns one part of the law, the entire Sarbox edifice would crumble.
The case could serve as an important signal of what kind of constitutional limits the court will place on financial regulations. Many of the proposals for financial regulatory reform have placed little emphasis on the constitutional limitations.
Henry Blodget, who has argued that SarbOx is responsible for destroying the IPO market, is positively giddy at the news.
Sarbanes-Oxley isn’t the only reason the IPO market is dead, but it’s part of it: Why spend millions of extra dollars a year complying with a law that won’t make your investors the tiniest bit safer and might get you thrown in jail for life if you blow a quarter?
SARBOX should be rewritten just because it’s expensive and ineffective: If a company really wants to defraud you, they’ll do it with or without SARBOX, and honest companies were already held to high standards before the law was enacted (the reason so many dotcoms went bust was not that they were committing fraud: It was that they were risky, early-stage investments in a boom and bust cycle).
But if it takes a legal challenge to prompt SARBOX reform, then so be it. The Supreme Court will now revisit SARBOX’s constitutionality. Here’s hoping they find it ridiculous.
We’ll see how this plays out. But Blodget certainly isn’t alone, and many of those who share his excitement have nothing to do with the IPO world. Just talk to any public corporation employee who has Sarbanes-Oxley compliance as part of his or her job description…