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Source link: http://archive.mises.org/7280/sarbanes-oxley-helping-to-nationalize-accounting-auditing/

Sarbanes-Oxley: Helping to Nationalize Accounting & Auditing

October 8, 2007 by

Sarbanes-Oxley, of course, was just a small step along the yellow brick road that will lead to total rule over private industry, especially in the realm of accounting and audit. Talk is heating up regarding the new Treasury Advisory Committee on the Auditing Profession. A recent Treasury release has Secretary Paulson stating that “this Committee has been chartered to develop recommendations as to what can best be done to sustain a vibrant auditing profession, a profession whose work is critical to investor confidence in our capital markets.”

This committee, made up of some very powerful and statist players, will “examine auditing industry concentration, financial soundness, audit quality, employee recruitment and retention, in addition to other topics. Treasury expects the committee to produce findings and recommendations by early summer 2008.” The government will also determine whether or not the structure of audit firms is proper, and whether the auditor profession is sustainable. The government is not hiding its omnipotent agenda; the fact that they will “examine” the employee recruiting and retention process should send some fairly transparent clues.

There is indeed a shortage of skilled players in the accounting/audit industry. Highly-skilled players are few, and the mediocre are many. That’s because accounting and auditing are difficult to learn and are loaded with complex value judments. The industry demands hard work, discipline, and a long-term commitment. The work force nowadays – most of whom were raised on daycare and TV and ankle tattoos – is loaded with undisciplined and lazy people who want easy jobs with gobs of vacation time and little-to-no responsibility. Thus this profession is not for them.When private contractual agreements between businesses and individual employees becomes the government’s business, a totalitarian wake-up call must be sounded. What’s so humorous is that the demand for skilled accountants, CPAs, and CFEs (Certified Fraud Examiners) has come about because of government regulation and because of the obscene difficulty in navigating the holy mess that is Sarbanes-Oxley – along with the other assorted “investor transparency” regulations. SOX demands highly-skilled consultants and individuals with a radical mix of exceptional skills. Most “accountants” are staff accountants with basic, low-level skills. Look at the job ads – SOX consultants are writing their own tickets. So, as it usually goes, government creates the skills shortage via its regulatory-created redistribution of resources, and then it creates a committee to investigate why the shortage exists.

Oops, that’s not all. Donald Nicolaisen, a former chief accountant at the Securities and Exchange Commission, notes that auditors have become “overly cautious,” and this has led to vastly increased costs for corporate clients. Really?!?! Wth the SEC and PCAOB yanking auditors and their audit recipients in opposite directions, it’s no wonder that billing hours are up, and, amazingly, costs tend to rise with billing hours. Liability issues for any CPA looms like a purple elephant in the room, and the public accounting profession, as a whole, is in the gonna-get-you spotlight.

With SOX, the government has created a massive blunder, and each ensuing “fix” only makes worse the previous problem, until we eventually see the entire auditing and accounting rule-making industry become fully nationalized. But that’s exactly what the regulatory dictators are hoping for.


Ron October 9, 2007 at 8:38 am

It’s lovely to see that the damage done by SOX will not only be perpetuated, but expanded ad infinitum by dutiful legislators. As if I should be surprised.

I’ve seen the costs of SOX up close and personal. I’m a database administrator, and data security is a large part of my job. When the SOX auditors descended upon us a few years ago, I and my fellow DBAs spent many hours describing, justifying, and modifying our security standards at the auditors’ behest. We would then have to resubmit them for approval, modify them again and resubmit, ad nauseum, until they were satisfied that security was restrictive enough to prevent some unauthorized person from accessing some critical piece of data (at least by the auditors definition).

After the initial audit process was completed (the process never actually ends, rather there are just lulls in activity while the auditors are looking for holes elsewhere) the amount of work that each DBA had to perform on a daily basis had increased by about 20%. We had to duplicate labor that was being done by other departments. Additional forms and time-consuming steps were required to grant access to anything. New production processes had to be tested and functionally verified by DBAs, in addition to the testing done by developers and QA testers before they were submitted to the DBAs for implementation.

All the while, it was painfully obvious that none of the extra steps or policies actually added any value. Our data was secure enough to satisfy our clients before the auditors arrived. The same is true of production processes. They were written and tested to meet the needs of our customers…no secondary verification necessary.

All told, the company spent about $4.5 million on initial SOX compliance. In addition, a team of internal auditors was hired permanently to conduct ongoing audits to ensure compliance with SOX regulations. Added to the additional DBA time, that brings the total annual cost to about $350,000. All of that additional cost was passed directly to our customers, who I’m sure were more than happy to pay thousands of dollars to sleep a little better, knowing the government was helping keep their data secure.

Brad October 9, 2007 at 11:11 am

The mediocrity of accountants is due to the need for more and more supply to meet statutory demand. The demand was created by regulation and complying with it. Such regulations are considered necessary because businesses were becoming too big and complex. How did much of this come about? Consolidating of existing businesses to create economies of scale large enough to handle the previous round of regulation. Of course many of these newly minted monstrosities, once they’ve attained the requisite economies of scale, delight in such regulations since it cements the barrier to entry of competition.

The seed was planted in the soil in 1933 when it was believed that government had the capacity to contain the chaos that is human endeavor. It couldn’t and it hasn’t. It has merely escalated its attempts with moving from one set of laws and regulations to another more individually invasive one. Unfortunately it apparently isn’t going to sink into enough skulls until the boots are on their throats.

The irony of all this is that I believe the power brokers in huge companies take their cue from government itself. They see that ledgers can be slushy, the important thing is the next press release. Keep the investors thinking everything is all right and it will be. Don’t worry about gargantuan debt burdens, just meet next month’s or next quarter’s cash flow and assume there will be enough idle money in the financial arms of the insurance companies that they can find new debt to retire the old. Just keep rubbing your lucky rabbits foot and you can sell any load of crap.

What these folk fail to see in time is if the wheels come off, they go to prison. If the wheels come off for the government, it’s someone else’s fault and 98% of the bastards are re-elected. I guess it has something to do with the guns.

Paul A. October 9, 2007 at 11:27 am


What a timely article for me. I practice corporate and securities law, and, as we speak, I am sitting through a 9 hour seminar on proxy disclosure for public companies. This is all the result of another one of the “reforms” adopted by the SEC called CD&A – compensation disclosure and analysis. This was a horrendously overreaching amendment to the SEC’s rules (are there any other kind?) which has cost public companies a whole pile of additional money (on top of their already inflated G&A expenses as a result of having to hire not only one of the Big 4 accounting firms but also a new specialist accounting firm to help them follow SOX 404) to recast their compensation disclosure, providing very little improvement in the detailed disclosure already provided to the market.

The seminar started with a diatribe from a self-important attorney from a Wall Street law firm who, oh by the way, happened to be head of the Corporation Finance department at the SEC and was one of those guilty of getting this trash to become part of the rules (which essentially means it is law – no Congressional hearings were held though, hmmm…). He had to let us know that it really is for the best and no, really, the investors really do want their portfolio companies to give a whole bunch more money to their lawyers and accountants.

Now, I’ve got to sit through more nonsense from all of these lawyers who go back and forth from the SEC to large Wall Street firms telling me how important it is to tell investors all this information that they didn’t ask for to begin with. All these people do is make sure there Wall Street firms can justify their $800 to $1,000 per hour rates. What a sick sick system we have!

Brent October 9, 2007 at 3:15 pm

What’s really funny is that the same congress that consistently berates “capitalist pigs” (i.e., investors) also claims to act in their best interest… to help them, of course.

TokyoTom October 10, 2007 at 12:27 am


With SOX, the government has created a massive blunder, and each ensuing “fix” only makes worse the previous problem, until we eventually see the entire auditing and accounting rule-making industry become fully nationalized. But that’s exactly what the regulatory dictators are hoping for..

Let’s be a little more clear. SOX was created by Congress – not the SEC or accounting or legal industries – as a cynical “leadership” initiative in the wake of the Enron and Worldcom collapses, but was really a kind of cover-your-ass exercise due to the strong influence of those firms in the Administration and COngree due to political contributions and other inside deals.

The financial collapses stemmed directly from the shocking short-term self-aggrandizement (theft, essentially) by corporate executives at the expense of shareholders that has been enabled by the steady growth of SEC rules. The marketplace would have been the best place to resolve the issue of shareholder/investor protection – but the politicians essentially have little understanding of or faith in the market, and so substituted their own judgment. The SEC was opposed to SOX and so were most in the legal and accounting professions (who could see a train wreck in the making), but none raised their voices too loudly, both out of opportunism and fear – fear that was obviously justified as the Republican administration illegally (as finally conceded by the Supreme Court, much too late to be meaningful) destroyed Arthur Anderson for its role in the scandals.

And what we are seeing is also a nationalization of corporate law, and expansion on the federal government at the expense of the state corporate regulators and the marketplace.

DickF October 10, 2007 at 8:03 am

It is ironic and amusing, but not surprising, that the primary “fixes” do nothing that would have changed the Enron situation and probably would have hidden it even longer.

The problem at Enron is that insiders who wanted to speak about the abuses were not able to because of insider trading rules. If they had spoken and the stock tanked they could have gone to jail so they kept their mouths shut.

Now to SarbOx. It’s primary focus, as Ron points out, is to keep information even more hidden and to make information even more secretive.

Under currency rules it would be even more difficult to see what Fastow was doing.

Karen De Coster October 10, 2007 at 11:03 am

“Let’s be a little more clear. SOX was created by Congress – not the SEC or accounting or legal industries – as a …”

Mr. Tokyo, your comments are certainly welcome. But since your comments have nothing to do with “correcting” mine, but only add to my comments with _your own_ additional thoughts, you might want to avoid the misuse of words in your attempt to convey your apparent superiority. I was indeed very clear in stating my points. Absolutely nowhere did I say “SOX was created by the SEC or accounting or legal industries…,” but you sure phrased your comment to convey that I *did* say that. Your opinions may differ from mine, but as one who oversees an entire SOX compliance program, on a daily basis for a very large company, I don’t think I need your non-correcting “corrections” as to the originations, history, complications, or other facts of SOX. Please try to use words more appropriately.

happylee October 10, 2007 at 12:20 pm

Great post. Does anyone know if there is a moderately academic but easily accessible article providing an overview of the art and science of auditing? I am not talking about Acc401 auditing class textbook, but something an Austrian would appreciate?

Ron October 10, 2007 at 3:17 pm

By the way…the numbers I quoted were merely the costs that were visible to me personally. I’m sure they don’t represent the entire cost of the whole foolish exercise.

Karen De Coster October 10, 2007 at 3:46 pm

Happylee, there really is not much for laymen that is interesting or particularly useful (or Austrian or moderately academic), but the New York State Society does have this decent (if short) overview:


TokyoTom October 11, 2007 at 2:34 am

Karen, thanks for your comment. I enjoyed your post and your insights on what is happening now. But I do think you were overly broad in simply laying all of SOX at the feet of some anonymous “government” or “regulatory dictators”, while not addressing the role of politicians.

As for accountants and lawyers, I am happy to clarify that I was not trying to address your remarks but other comments upthread. I’m sorry that I didn’t do that more carefully.

By the way, how confident are you that Paulsson is heading in the wrong direction with this new committee? Are the purposes, as outlined in various press releases, so bad, or is it simply that one can’t expect the SEC to undertake (or the powerful statist players on the committee to advocate) the real reform, which would involve deregulation and greater reliance on the markets?


DickF October 11, 2007 at 2:01 pm

TT wrote:

By the way, how confident are you that Paulsson is heading in the wrong direction with this new committee?


Think structurally rather than personally. Is it good for our economy and country for the government to be writing the accounting rules?

Mike Z. October 16, 2007 at 11:46 am

“By the way…the numbers I quoted were merely the costs that were visible to me personally. I’m sure they don’t represent the entire cost of the whole foolish exercise.”

Ron – your a DBA who has their little role way down in the IT Department playing around with databases or something like that so to make an analysis of the costs strictly on some number you pay out is short sided. In addition, SOX has nothing to do with the customers and all to do with the investors and guess what, your competitors are assuming that exact same expense so I wouldn’t worry all too much about the competitive disadvantage. In additon, Europe is no haven with their labor laws and if you we’re to see J-SOX and the rest of the Asian rules (the Shangai Stock Excahnge take the cake!) to come its going to make US SOX look like a policies and procedures exercise.

Finally, here in Hedge Fund land our Institutional Clients demand we only invest in well controlled companies (in most funds, while others take advantage of poorly controlled companies) and I can assure you they (people who probably control your pension so you can retire on time) pour over the Corporate Governance and Internal Control due dilligence that we perform to ensure that companies we invest in will not just disapear some day just like that. Yes, SOX has been distorted but the new guidance is already paying dividends to streamline the process (of course if implemented correctly) and while is only one of many inputs we use for the analysis, it is one of the key ones we use when looking at public companies.

And finally, as being part of one of the largest HF’s that plans to go public (so you can avoid the typical mom-and-pop HF blowup line), it will all come full circle as we prepare our SOX plans to become compliant ourselves which while something we are not head over heels to do, at least understand the rationale and reason to do it.

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