The Sarbanes-Oxley Yawn: Heavy Rhetoric, Light Reform (And it Might Just Work)

Abstract

A thorough examination of much ballyhooed Sarbanes-Oxley Act reveals dominantly a federal codification of extant rules, regulations, practices, and norms. Despite advertising it as the most far-reaching reforms of American business practices since time of FDR, a soberly apolitical view sees Act as more sweep than Important are provisions calling for nine studies; redundant but much publicized were certification requirements imposed during summer of 2002; other moves are mere patchwork responses to precise transgressions present in popularized scandals. The Act is far from trivial, however. A silver bullet relates to structure and funding of those who set standards for auditing and accounting in United States. Stripped of power is AICPA, and altered in funding structure is FASB. All parties but Congress are singled out for a wrist-slapping (auditors, accountants, officers, directors and committee members, lawyers, securities analysts, credit rating agencies, investment banks and financial advisors, state corporate lawmakers, SEC, Federal Sentencing Commission and even Supreme Court). No reexamanation of Congressional reforms relating to private securities litigation or erstwhile barrier between investment and commercial banking appear. In fact there is implicit endorsement of Congressional approach, rooted in process and control philosophy of Foreign Corrupt Practices Act, which Act follows. This reading of Act as modest is advanced in three stages of this Article. The first sets background by summarizing salient features of dominant precipitating scandals and their times. The second stage dissects every material provision of Act in context. The third and final stage suggests why political rhetoric and substance diverged so widely, with illustrations of what a substantively bold Act might have looked like. Explaining Act's rhetoric-reality yawn requires speculation but informed hunches readily emerge. On one hand, Congress may have understood that visible debacles were not chronic epidemics but discrete pathologies and their root causes were market psychology beyond its regulatory reach (hence a reformless Act). On other, Congress knew that public perceived an acute systemic crisis of power abuse they had no responsibility for creating (hence sweeping rhetoric). Another explanation, which also explains Act's call for so many studies, is that it is too soon to diagnose deep causes or broad shortcomings but that immediate action was politically expedient. The studies bridge gap between action and knowledge, constituting continuing threats to their targets to abide by spirit of Act, a threat to make sweeping rhetoric real reform.