How has Sarbanes-Oxley affected your business?

December 11, 2008 9:54 AM by Karen De Coster

This question was put to Loews Corporation CEO James Tisch. His answer is splendid:

It's probably doubled our accounting fees. And I would say that about eight and a half percent of that reflects value to the company. So there was some value from Sarbanes-Oxley, but we are paying an enormous price for that value. And a lot of it is make-work. A lot of it is just checking that you've done something, that you had written the right procedures. It's mindboggling how much work it is and how expensive it is.

Along with Sarbanes-Oxley came what's called the Public Company Accounting Oversight Board (PCAOB). And the PCAOB is there to grade the accountants. So the accountants, because of the PCAOB, are unwilling to work with the managements of companies because they know that they're going to be scrutinized by the PCAOB. So there's much less of a collegial atmosphere between the company and its auditors and it's become somewhat more antagonistic. I don't believe that's in anybody's best interest at all.

Sarbanes-Oxley Section 404, which created a lot of these problems for corporations, is exactly two paragraphs long. And from that spawned this enormous industry of scrutiny and oversight of financial statements. So it just shows you just how powerful Congress can be. And the sad thing is there was a problem. There were some companies that were doing bad things. Auditors missed certain things. But I would submit to you that it was just a small number of companies. Very small, I mean, a handful. And as a result of their actions, every listed company now has to comply with these rules.

So yes, there is some value that comes out of SOX, however, it's a very expensive way to gain value, and also, the company's executives are not making the decisions as to where the value will be added and how much should be spent/budgeted in order to achieve its goals. SOX is a coercive affair that burdens companies with loads of useless documentation and retention and fritters away valuable resources (people and time) on non-value added processes that would otherwise not be undertaken. As to his make-work comment, as we SOX managers like to say, "it's great work if you can get it." Tisch also makes the great point - not often heard - that the PCAOB monster has destroyed the relationship between the company's management and its auditors. There used to exist a relationship where auditors would advise, lay out expectations, and generally guide the client through the known rules, along with their own peculiar protocols. Now the auditor-client relationship is more of a game, and it's definitely antagonistic. It has become much more difficult to ask questions and get specific answers. We're often left to hang, guessing at a question while being expected to answer it correctly. It's like someone telling you "don't speed" on the highway, but refusing to post the speed limits.

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Obsolete Ideas from Dead Living Economists

November 25, 2008 9:30 AM by Karen De Coster

In the New York Review of Books, Paul Krugman calls for a "good old Keynesian stimulus." He says we need to mimic Japan, Sweden, and FDR in terms of our strategy for giving new life to dead banks. Krugman, like Laurence Kotlikoff, is horrified that people are starting to save money. Therefore, he says, the next stimulus plan should "focus on sustaining and expanding government spending--sustaining it by providing aid to state and local governments, expanding it with spending on roads, bridges, and other forms of infrastructure." He says Keynes is "more relevant than ever." At the end of his call to Keynesian arms, he states, "I believe that the only important structural obstacles to world prosperity are the obsolete doctrines that clutter the minds of men." Apparently, unworkable Keynesian doctrines don't fall into the "obsolete" or "clutter" category.

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Krazy Keynesian Wants Shopping Subsidies

November 17, 2008 6:44 PM by Karen De Coster

The key is realising that recessions are usually consumer cycles, not business cycles. They're driven by weakening demand first for homes, then for consumer durables, and finally for non-durables and services. As consumers stop spending, businesses stop investing, and the economy "recedes".

It was a surreal moment listening to Laurence Kotlikoff, a Professor of Economics at Boston University, on Bloomberg radio last week as he discussed his plan for curbing savings and triggering spending. This is a recent column of his (along with a co-writer) from the Financial Times that discusses his plans for a Keynesian salvation for America.

He invokes Keynes' Paradox of Thrift and says that evil consumers are hoarding every dollar as if it's their last. He says that these "collective and obsessive attempts to save" (the "panicked-saving trap") are undermining the economy. Kotlikoff is horrified that a large percentage of the stimulus monies received by taxpayers were saved. In fact, he says tax cuts are not a good thing because they result in savings, which doesn't necessarily translate into spending money. He thinks that distributing debit cards to people is an option, but he says that won't work quickly enough. (Never mind the fact that enterprising savers who would rather have cash than shopping privileges could sell their debit cards at discounts to high time preference people who plan to use them to buy.) So, what is his plan? Uncle Sam's National Sale.

Here's how it would work. Uncle Sam would pay each state a fixed percentage - say 5 per cent - of the 2007 consumption of its residents. States would be required to reduce their retail sales tax rates by enough to generate a six-month revenue loss (calculated using 2007 data) equal to the amount they'll receive from Uncle Sam.

For states with low or zero sales tax rates, implementing this policy requires making their sales tax rates negative, ie subsidising purchases. Shoppers would see a negative tax on their sales receipts, lowering their outlays. State governments would reimburse businesses for paying the subsidy and, in turn, be reimbursed by the Feds.

States would be free to broaden their sales tax bases to apply the National Sale to all retail sales, not just the sales currently covered in their sales tax systems. To make the policy progressive, states could also reduce sales tax rates by more for goods and services that are disproportionately consumed by the poor.

Finally, he says his plan will give us "economic medicine where it's most needed - on consumer spending, giving everyone an incentive to spend now and begin again to trust our economy and its institutions."

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