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With the first presidential debate in Denver featuring a heavy focus on the economy, a debate staged on Wall Street on Wednesday examined the legacy of legislation that dramatically changed how public companies participate in U.S. capital markets: The Sarbanes-Oxley Act of 2002. Despite its near-unanimous passage by Congress (only three people voted against it in the House of Representatives), the law has been vigorously attacked and defended for most of its decade-long history. The law’s sweeping changes to the country’s compliance regime—following the mega-meltdown accounting scandal at Enron Corporation—created the Public Company Accounting Oversight Board and required executives to vouch for the accuracy of a company’s financial statements. SOX’s 10-year anniversary has fostered yet more occasions for discussion – with this latest one taking place at a new corporate social responsibility event called COMMIT!Forum. The debaters on stage at the iconic Wall Street locale Cipriani included the bill’s namesake, former Maryland Senator Paul Sarbanes, and John Allison, the former CEO of BB&T Corporation and new president of the Cato Institute, answering the question, “Has mandated corporate disclosure done more harm than good?” Sen. Sarbanes opened the debate by setting the scene in late 2001, when Enron restated its financials and then filed for bankruptcy. “It turned out Enron was the canary in the mine shaft,” Sarbanes told the conference attendees. And in the months that followed, the market value of public companies across the U.S. fell by trillions of dollars, jobs were slashed, retirement savings evaporated. “That was the challenge the Senate Banking Committee faced,” Sarbanes said. The committee held numerous hearings, and as they progressed, an “agreement emerged” over key problems, including inadequate oversight of auditors, weak corporate governance procedures, and stock analyst conflict of interest. That led lawmakers to put an end to self-regulation of accounting firms and bolster the role of audit committees. Ultimately, Sarbanes argued that “transparency, accountability, and disclosure” were vital to restoring investor confidence. “The integrity of our capital markets and the confidence of our investors, and therefore the underlying strength of our economy, are at stake, “ he said. The next speaker at the event, Mark Calabria, director of financial regulation studies at the Cato Institute, offered a different perspective. He argued that the bill’s regulation of auditing practices has come with high costs. The registration and examination system has raised barriers to entry for auditing firms, while the increased demand for auditing services benefits only a few. At the same time, by forcing companies to change auditors on regular basis, SOX “embraces auditor ignorance,” he said. “Auditor independence is not free,” Calabria said. “It comes at the price of the auditor understanding of both the company and the industry in question.” Citing the Securities and Exchange Commission’s own estimates, Calabria said that publicly traded companies spend an average of $2 million a year to comply with the law. He also said that it has had a negative impact on the competitive nature of U.S. markets overall, reducing the number of firms going public on U.S. exchanges and prompting companies to “go dark” by de-listing their shares. As for SOX’s “infamous section 404”—the law’s provision that requires management to attest to the accuracy of the company’s financial statements—Calabria said he didn’t believe it was an effective deterrent. The COMMIT!Forum audience also heard two (opposing) on-the-ground perspectives of the law. Lauralee Martin is the chief financial officer and chief operating officer at the commercial real estate services company Jones Lang LaSalle. At the time SOX was passed, she admitted that she was “extremely opposed to the bill.” Her thinking was: “You cannot legislate anything that will stop greed. You cannot legislate things that will stop bad judgment, or even what is going to determine appetite about risk-reward.” But she now views the law quite differently. “It’s very much about responsible control environment and a very clear delineation about, of the fiduciaries, who is responsible,” she said. Compliance costs are an investment, Martin noted, and good management teams figure out how to get the most out of it. Along those lines, she identified what she sees as four beneficial outcomes from SOX: emphasis on tone at the top, an empowered and qualified audit committee, a better control and process environment, and better audits. Executives can’t claim ignorance anymore about what’s going on inside their companies, she argued. “There’s no excuse for management not to know, and Sarbanes-Oxley has made it very clear that the C-suite is responsible,” Martin said. The last word at the event went to John Allison. The ex-CEO has a background in risk management and has been analyzing financial statements since the 1970s. “My first problem with SOX is that there was not a problem that needed fixing,” he said, arguing that “95 percent” of Enron’s losses occurred when the tech bubble burst, before any fraud occurred.

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