Revisiting Sarbanes-Oxley: was the well-intentioned landmark legislation slapped together too quickly?

• Author: Whalen, Christopher

The financial scandals involving Enron, Global Crossing, and Arthur Anderson were front page news a year ago. Members of both political parties, fearing the wrath of voters with approaching mid-term elections, were scrambling for cover. The Senate unanimously passed a piece of draconian legislation sponsored by Maryland Democrat Paul Sarbanes, a man never particularly friendly to free markets or private property. The bill was expected to die quietly in the House.

But early last June the scandal involving WorldCom broke into the news and, as one Republican operative puts it, "Suddenly the Sarbanes legislation took on a life of its own." Members of both parties, facing a midterm election and enraged constituents, clamored for action, pressing House Financial Services Committee Chairman Michael Oxley (R-OH) to move the legislation. The Bush White I louse let it be known that no delay would be accepted. Notes one insider: "Mike Oxley put his name on the legislation. managed to make some minor changes, and sent it to the floor where it passed almost unanimously."

The Sarbanes-Oxley legislation made it through conference with the Senate in three days and was signed into law on July 30, 2002, by President George W. Bush, who even lauded the event by correctly characterizing the bill as "the most far-reaching reforms of American business practices since the time of Franklin Delano Roosevelt." Thanks to President Bush and the Republican Congress, Americans must live with a law that greatly expands government regulation of the financial markets, but probably does nothing to protect investors from future acts of fraud.

More than a year since Congress passed the legislation known as Sarbanes-Oxley, inhabitants of Wall Street and Main Street are still trying to figure out how to comply with the law. As Washington's latest foray into market intervention, the law attempts to make lawyers, directors, and accountants police corporate behavior. The legislation mandates specific rules for officials of public companies and the professionals who work for them, and sets tough criminal penalties for violations. But like all attempts to regulate market behavior, Sarbanes-Oxley is very long on promises but short on practical implementation.

The Sarbanes-Oxley legislation sweeps away decades of jurisprudence based on Delaware law and standards for corporate responsibility such as the Prudent Man rule. In 1830, Judge Samuel Putnam set down a general canon for...