December 3, 2007
Sarbanes/Oxley - How It Affects Global Competition And Privately Held Law Firms
Bruce MacEwen (Adam Smith, Esq.) in a recent post notes the negative effects of the Sarbanes/Oxley Act of 2002 (SOX) on the global competitiveness of
- It encourages highly risk-averse management, the antithesis of American entrepreneurialism and innovation.
- Ironically enough—along with Regulation FD—it discourages corporate disclosure and communication with analysts and other commentators and observers since the statement not made cannot later be labeled misleading.
- The requirements for independent directors operate to disqualify anyone with actual experience in the industry and, perhaps, judgment, perspective, or insight.
- Worst of all, of course, the potential criminalization of accounting judgments—touching not just the corporation but senior executives—operates, as one managing partner put it to me, to make every publicly US-listed company long for the day when all they had to worry about were the quarterly earnings expectations of Wall Street: "Today, it's not the stock analysts you've got potentially looking over your shoulder, it's the US Attorney."
- Finally, there is universal consensus that had SOX been in place before the parade of the Enron, Tyco, and Worldcom horribles, they still would have happened. Why? Because one cannot legislate common sense or integrity. More than one person pointedly observed that fraud and misrepresentation have always been illegal and we've always known quite well how to deal with them. Piling SOX on top had the same practical effect as "making it illegal to break the law" (that would be zero).
MacEwen argues that the above have created unintended consequences that may "help dislodge
It isn't just MacEwen who questions the benefits Sarbanes/Oxley. The negative effects of SOX certainly merit consideration, and perhaps "knee-capping its provisions" might be in order. However, let's go in the other direction for a moment: Could SOX be expanded to include privately-held corporations and find its way into the management of law firms?
Currently, only two provisions apply to closely held corporations: whistleblower protections and prohibition against destroying, altering, or falsifying documents that could be used in a legal proceeding.
As law firms start to restructure and operate more like corporations (ie, hiring C level management, moving from partnerships to limited liability companies or professional corporations, etc) some argue that best practices dictate that companies begin to implement at least the basic mandates of SOX (particularly when revenues approach $50 million). An interesting discussion of this by Stephen Bainbridge (with an alternative view by Jennifer Johnson) can be read here on the Business Associations Blog.
As ridiculous as it sounds on its face, lawyers know that the expansion of Congressional Acts knows no boundaries. Congress has a habit of creating short-sighted Acts that have long-term unintended negative consequences; the application of RICO to abortion protesters - though short-lived - comes to mind. This could be a new area of law - defending law firm managing partners from causes of action brought by non-managing equity partners over the mismanagement of their books! Lawyers suing lawyers requiring lawyers to represent the lawyers sued. A self-sustaining marketplace!
All kidding aside, the purposes of SOX shouldn't be lost to law firm managers. A large purpose of SOX is to ensure fiduciaries are properly overseeing the management of their corporation's books. Managing partners (or their equivalent) are the fiduciaries of their firm and are responsible for the accounting of their firm's finances. Embezzlement is a real concern for law firms. The accounting of the law firm should not be without oversight.
That said, do you think SOX should be cut at the knees? Or, since the purpose overlaps existing law (relative to fraud and misrepresentation), is SOX just reactive bad law that should be repealed altogether? What would be a better way to address the purposes of SOX?
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Filed under Ethics, Operations, Policies/ Procedures by Brian J. Ritchey
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