Mind the Books

So much news, so little time. Let’s see, should we talk about Rick Santorum comparing Democrats who uphold the law to Hitler invading France? No. Should we talk about Saddam Hussein in his underwear? Er, no. (Although I’m a little worried that it’s so easy to get past security and take pictures of the man.) Eh, for now we’ll stick with the mundane and boring—but important!—topic of corporate regulation.

Usually if one want an answer to the question, “Is X a good thing,” the place to turn is emphatically not the pages of the Economist. And sure enough, their take on Sarbanes-Oxley—the corporate regulatory bill passed in the wake of the Enron collapse—is vintage stuff. Will the statute reduce financial fraud? “It might.” Will it work? “Time will tell. It is possible that Sarbanes-Oxley will come to be seen as both too much and too little.” Okay, thanks.

To be fair, it’s a tough issue to assess. The basic question is whether it costs too much to impose regulations that mandate the sort of honest accounting and rigorous auditing that prevents large-scale looting, ala Enron or Worldcom. The problem, though, is that the costs here are more or less well-known—one study has pegged the downside to Sarbanes-Oxley at $1.4 trillion—but the benefits are difficult to quantify. You can’t measure the possible benefit of a hypothetical major corporation not going bust through shady dealings, especially if you don’t know whether or not that company would have pulled an Enron in a laxer regulatory atmosphere. Counterfactuals are hard to quantify. So inevitably, the news stories will be stacked against the regulation—those concrete drawbacks always draw headlines.

Meanwhile, Clay Risen of the New Republic had a story last November that’s worth dredging up again: the real regulatory problem these days isn’t insufficient regulation; it’s the fact that the accounting industry has consolidated among four big companies, and those companies have much-too-tightly intertwined consulting and accounting divisions. Obviously a firm isn’t going to much rigorous accounting when it’s also advising the company being audited on how to pay as little in taxes as possible.