A Sarbox Update

Josh Wright —  4 December 2009

From Larry Ribstein:

A few years later, Henry Butler and I wrote a book decrying SOX, and discussing the evidence that was accumulating against it, as well as the SOX suit. Here’s an excerpt from the book abstract:

If the suit is successful, Congress likely will have an opportunity to repair the constitutional defect. Although political reality suggests that Congress will not abandon SOX, it may respond to the mounting criticism by fixing its most egregious faults.

The pro-SOX media and pundits scoffed at the suit. But as I pointed out back in 2008 when some DC Circuit judges appeared receptive to plaintiff’s argument, the suit “may actually have some legs.”

The appellate court rejected the suit, but the Supreme Court agreed to hear it. I joined an amicus brief arguing for unconstitutionality.

Now the pundits have retrenched a little to the position that even if the PCAOB goes, the rest of the act will be saved despite the absence of a severability clause. But the pundits have been surprised how far this suit has gotten already, and they may well be surprised again.

Meanwhile, Congress is thinking about amending the law to exempt small firms. This bill gives some indication of what might happen to SOX if the whole thing has to go back to Congress.

As I said back in 2006:

SOX wasn’t just a bad law, but a uniquely bad law, passed under uniquely bad conditions without any of the safeguards that normally accompany major legislation.  And even if repeal or drastic shrinkage is impossible, it’s still necessary to make the case as a warning against future SOX’s.  One way to do that is to establish SOX as a paradigm of bad law. In other words, to make Sarbanes and Oxley the Edsel Fords of corporate governance regulation.

I’ve been watching the SOX debacle play out for seven years. It will be interesting to see how this ends.

One response to A Sarbox Update


    I have heard that once upon a time in 2002, one idea was to integrate the PCAOB’s operations as a separate division within the SEC– that is, a Division of Public Accounting Oversight, along with the Division of Corporation Finance, Division of Enforcement, etc.

    I can’t help but wonder where we would be today if Washington had gone that route– because, really, going to court over the constitutional issue is a diversion from the true reason critics hate SOX: It costs too much. But rather than argue their case in Congress that we should lower our standards for accurate financial reports (because that’s what SOX is all about, and that’s what ‘relaxed’ SOX compliance is), they’ve gone running to the judiciary with any excuse they could find to overturn a law they don’t like. This is exactly the judicial activism conservatives so forcefully denounce– right up until they need it to suit their purposes. Then it’s OK. Sad.