Defending SOX

David Henry writes in Business Week that "Not Everyone Hates Sarbox: The Much Maligned New Rules are A Big Hit With Investors."  He surveys large investment managers that make the simple point that SOX makes a companies financial better.  There are fewer earnings restatements, and fewer adjustments for unusual charges and write-offs, expensing of stock options, and better internal controls on the integrity of the accounting numbers.  In short, corporate financial statements are more reliable.  No-one disputes the SOX produces better financials, the issues is at what cost.  We could hang a CEO now and again that cooked the books and financial records would be much, much better but we are unwilling to incur the costs of such Draconian punishment.  It is an interesting game theory problem -- with harsh accounting rules, investors know more and invest with less risk in the short term, but incur more problems in the long run as companies expend too much money on accounting compliance and too little time and money on operations.  We all know more about companies that are less productive (and, given an international market, less globally competitive).   Money managers, who are paid by beating market indexes, may very narrowly focused on immediate performance and the group we should least pay attention to on whether the regulations make social sense.