In this article entitled Are Acquisitions Replacing IPOs? Tim Draper of famed venture capital firm Draper Fisher Jurvetson (whose logo would do well in a worst-logo-ever contest) makes a statement that expresses my frustration with the US government’s involvement in the business world.
“Sarbanes-Oxley has been a disaster for all entrepreneurship. There is no way. We used to be able to take a company public that was profitable at $20 million in sales. But today Sarbanes-Oxley means that you have to pay your accountants and lawyers about $2 million a year to keep the thing going.”
I’m far from being any sort of expert on Sarbanes-Oxley, but here’s what I do know.
1. It’s a relatively new government regulation, designed to keep shareholders in public companies safer by providing stricter regulations.
2. It costs roughly $2M per year for a public company to comply with SO.
3. That $2M has to come out of profits, which means two things; 1) a public company with margins of 20% has to earn at least $10M more per year than they did before in order to make being a public company worth it, no small feat for a company with revenues of $20M, $50M, or even $100M, and 2) those companies that can’t grow revenues enough to break even will see the value of their company decline, which hurts the very shareholders SO is designed to protect.
4. SO was a direct response by the government to the corruption that lead to the collapse of Enron so that politicians could look like they cared about the little people, the shareholders and pensioners.
5. And my main point–Lay and Skilling, the top executives at Enron, were found guilty even though they were not prosecuted under the regulations of Sarbanes-Oxley, seeing as how SO didn’t exist when they committed their crimes, which therefore brings up the question of whether SO is necessary at all.
As usual, when politicians step in and try to fix things in the private sector they end up hurting the very people they’re trying to protect. Something the mass populace of the US, and indeed the world, does not seem to understand is that if the government makes it more expensive for a business to be a business that cost gets passed on to the consumer.
If the government steps in and tells Wal-Mart they have to offer health benefits to their employees (not a single one of which is being forced to work at Wal-Mart), do you think Wal-Mart is going to pay for those benefits? No, you will. Wal-Mart will simply raise their prices or take some action to cover the expense, but ultimately you as the consumer will be paying for those benefits, not Wal-Mart.
But the regulations of SO are a much more extreme case in that these regulations provide virtually no benefit to anyone other than the accountants and lawyers who have to be hired to help companies comply. The government doesn’t get more tax revenue, shareholders aren’t necessarily protected any more than they already are, employees don’t get paid more, and the public doesn’t get lower prices. On the contrary it is likely the government will get less tax revenue (since a company’s profits will be smaller due to SO compliance expenses, and companies only pay taxes on profits), shareholders will see the value of their investments diminish or at least not be worth as much as they were, employees will receive less since the money that could have gone to them is being spent on SO compliance, and the public will see higher prices as companies try to cover the SO expenses.
The great thing about the US economy is that it is still more free and easy to work in than most of the world, but if the government would remove useless regulations like SO and take steps to promote the growth of business instead of the taxation thereof our economy could grow beyond anyone’s wildest dreams, providing heaps of tax revenue, higher paying jobs, and lower prices.