Do you hire
more cooks, or do you hire more accountants?
Under the
Sarbanes-Oxley Act, you hire the accountants. The restaurant chain
in question is Max & Erma's; its CFO told researchers at the
Competitive Enterprise Institute the company will have to pay
$500,000 to $600,000 every year to meet the demands of the new
anti-fraud law, Congress' attempt to avoid more Enron-like fiascos
by making businesses pay accounting firms to keep them in check.
If spending
half a million dollars on accounting instead of growth isn't depressing
enough, what do you say to $100 million a year? That's what oil
giant BP, a British company whose U.S. business generates less
than half its income, is paying, according to its CEO. And that
figure is just "external costs"; it doesn't include
the time the company's own employees spend complying with the
new law.
Or how about
96 percent? That, a study by the law firm of Foley & Lardner
found, was the increase last year in the average audit fees of
smaller public companies -- from $532,000 in 2003 to $1 million
in 2004.
The law's
defenders claim its good consequences outweigh its costs. But
if that's so, why not let investors figure it out? If certain
accounting practices make companies better investments, investors
will put their money in companies that use those methods. If having
your accountant grill you for not having a written policy on hiring
and firing will make your business sounder, you don't need the
federal government to force you to do it.
Even the
regulators may be realizing this law has gone too far: Last week,
the Securities and Exchange Commission (SEC) proposed a rule that
would spare some foreign companies the full burden of Sarbanes-Oxley,
and an SEC advisory committee suggested protecting small American
corporations.
We don't
need the government to force businesses to spend half their profits
on accountants, because free markets police themselves. Those
that serve customers well are rewarded with more customers; those
that do well for investors attract them. Bad guys who cheat get
a reputation for cheating. They lose customers, lose investors
and go out of business. Think of how eBay works. The selling price
of each item is determined by auction, so buyers and sellers both
get the best possible deal. Sellers are rated by their customers,
so the "community" quickly identifies cheaters.
The competition
of the market protects us better than the ever-mounting pile of
rules legislators pass. And it keeps the costs reasonable, because
the private sector has to bear its own burdens, while government
forces its costs on others.
The market
doesn't catch everything -- there will always be fraud on eBay,
and, on a larger scale, scams like Enron. But Sarbanes-Oxley won't
catch all the fraud either.
Competition
will catch more of it. The more I've watched the markets work,
the more impressed I've become with how competition solves problems
with speed and flexibility rarely seen in government-imposed solutions.
Enron and
the other recent business disasters are evidence of the market
working. Government regulators didn't discover the deceit. Enron's
lies were revealed when private security analysts raised questions
and private investors started dumping the stock.
The cheaters
have been caught, and the cheating stopped. The bad guys can't
do it anymore. No one is laughing all the way to the bank.
No one,
that is, except the accountants the government is forcing businesses
to hire.
