Sarbanes-Oxley Reform Needed For Stimulus?

Is Sarbox holding back innovation?


Yesterday Thomas Friedman wrote about some ideas to improve America's capacity for innovation.  Here were some (emphasis added):

Barrett argues that we should also use this crisis to: 1) require every state to benchmark their education standards against the best in the world, not the state next door; 2) double the budgets for basic scientific research at the National Science Foundation, the Department of Energy and the National Institute of Standards and Technology; 3) lower the corporate tax rate; 4) revamp Sarbanes-Oxley so that it is easier to start a small business; 5) find a cost-effective way to extend health care to everyAmerican.

I'm going to expand on point number 4. It might seem strange to think that Sarbanes-Oxley has anything to do with small business. After all, the law deals with the financial reporting requirements of public companies. Sure, there are public companies that are much smaller than others, and public companies with not that many employees, but these are phenomenally successful companies that represent only a tiny fraction of all the businesses in the country. They are very complex enterprises compared to your average business.

But the effects of Sarbox end up being felt outside the relatively small number of public companies.

The rise of Sarbox has come at the same time as a decline in venture capital. Obviously the recession has a lot to do with it, but many argue that Sarbanes-Oxley was dampening venture capital investment before the recession. The more complicated auditing, recordkeeping and reporting requirements has decreased the number of IPOs, as even Eliot Spitzer pointed out when he was New York AG. So there are lower potential rewards for entrepreneurs to start fast-growing companies that have a shot at going public one day. Only a few will succeed, but it helps the economy to have as many as we can trying. Sarbanes-Oxley makes it less worthwhile to try.

It also increases costs for businesses that don't even have the intention of going public.  According to Jeff Cornwall:

However, the impact of Sarbanes-Oxley will not just be on public companies. Sarbanes-Oxley is already influencing commonly accepted standards of many private small businesses and non-profits. That means that even though these small organizations do not technically fall under this law, accountants are beginning to act as if they do in some areas of reporting. This is primarily to limit the accountant's liability in case an outside investor moves toward litigation, or in the case of a non-profit, if someone challenges the financial management by the board.