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Chapter 4: Government Overreach

force, undermining not just the economy and political
system, but the foundations of our culture.

Sarbanes-Oxley Act

The Sarbanes-Oxley Accounting Reform Act in
2002 rewrote accounting and disclosure rules for
publicly traded companies. The purpose of the Act is to
prevent business scandals, a noble pursuit. The Act has
given the federal government more power to intervene
in credit markets. The danger is that the bill has allowed
the government to impose penalties on selected
companies of its choosing.

Sarbanes-Oxley established the Accounting
Oversight Board and mandated corporations to deliver
internal management reports to the board. Executives
who approve unsubstantiated records face fines of up to
$5 million and 20 years in prison. Section 404 requires
costly external audits of companies, apart from the
company’s financial statements.

Sarbanes-Oxley is the most visible sign of
excessive regulation and government overreach, and a
reason foreign companies forgo U.S. public listing.
Large firms can absorb the high costs of compliance
because they have the advantage of economies of scale,
whereas smaller businesses are less able to meet
compliance costs. Congress has exempted companies
with less than $75 million of assets to lessen the burden
on small businesses.

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