Thus, Sarbanes-Oxley, of which the two most important parts were: a) that corporate officers sign off on the integrity of their company's internal financial controls; and b) the company pays for an outside audit of (a). The first requirement seemed benign enough -- until company directors realized that their personal assets would be vulnerable to the damages done by some unknown employee deep in the bowels of the company committing fraud or absconding with company funds. That led to an exodus of some of the wisest and most veteran talent in high tech from the corporate boards when their expertise might have done the most good. In other words, just when they needed to get smarter to compete in the global marketplace, US companies got dumber.
But it was b), the audit requirement, that was the real company killer. Some estimates put the cost of such an audit at as much as $10 million -- and even the most upbeat estimate by S-Ox proponents, put it at close to $1 million. Either way, it was enough to keep thousands of hot high tech companies from even considering Going Public -- and donating all of their profits to a S-Ox audit-and-compliance company. Thus, the end of high tech IPOs -- the greatest wealth redistribution engine ever -- and a decade of mergers and acquisitions.
The irony of all this, and the lessons that seem to have been lost on everybody inside the Beltway, is, first, that Sarbanes has done nothing to stop either economic bubbles or corporate criminal behavior; and second, that the system actually worked in the first place. The bad guys got caught. And the dot.com bubble, far from being a conspiracy, was in fact the natural trajectory of a high tech boom, in which the mortality rate of new companies is always 90+ percent. Sure, it was messy, and cost thousands of new start-ups -- but it also gave us Amazon, eBay, Orbitz, Google, etc. That's how it works; the only difference that it was the first time regular folks had ever experienced it.
Sarbanes-Oxley was controversial from the beginning. Elected officials loved it because it made them look tough on corporate crime. Big business hated it, because of the cost and the exposure -- but once they survived the director exodus and realized that, being rich, they could use S-Ox as a cudgel to crush their small and emerging competitors -- they embraced it. Entrepreneurs complained, of course, but they can't afford lobbyists and have no political power . . .so who listens to them? And all that the general public heard was that these new regulations would keep them from ever seeing another Enron.
Tell that to Bernie Madoff. The reality is that Sarbanes-Oxley has not only accomplished nothing that it promised to do, but it has sorely damaged the economic health of this country. What could have been accomplished by spending 1 percent of this amount on beefing up enforcement at the Justice Department and SEC instead turned into a monster that helped to weaken our economy just as we were sliding into the biggest recession in our lifetimes. And now, lacking a new generation of hot young tech companies to lead us out, we face a long, slow slog back to prosperity.