Don’t miss Holman Jenkins, Jr.’s Business World column this week in the Wall Street Journal ($) in which he reviews the rather remarkable effects of the Sarbanes-Oxley legislation, which was Congress’ knee-jerk public relations reaction to the WorldCom and Enron scandals:

No wonder that the annual bill for Sarbox is going through the roof, with the latest estimates being about $6 billion for the Fortune 1000 alone. One investment banker estimates that a small company nowadays would have to generate $150,000 in free cash annually just to cover the additional paperwork before it can even consider going public. Then there’s upwards of $100,000 each to insure all who sit on its board, if any can be found. Oh yes, and the fact that audit fees, for the average company, have risen about 50% in a single year.
No wonder, too, that the number of companies alerting the SEC that their latest financial reports will be late doubled last quarter, adding to a backlog of late filers that recently topped 600. One strategic-investor type who sits on the boards of a number of companies called a few weeks back to gripe in detail about what all this was costing the economy. Under the SOX regime, something as slight as an anonymous letter alleging accounting irregularities can effectively deliver a company entirely into the control of outside auditors. Directors, so fearful about their own liability that they stop thinking about what’s good for the business and worry only about securing their own alibis, write a blank check with shareholders’ money to do whatever the auditor dictates.

And though Sarbox compliance has become a gravy train for auditors, Mr. Jenkins points out that it has come with a “Faustian Caboose:”

But, ahem, Sarbanes-Oxley has at least fixed a lot of real problems, right? Let’s recall that the Internet and telecom bubbles were occasioned by investors who weren’t interested in published financial accounts — they were interested in the speculative potential of new technologies and new business models.
Secondly, there was the problem of how company promoters and CEOs behaved in the presence of a stock market willing to throw money at such speculative endeavors. Neither of these issues is addressed by Sarbanes-Oxley. Nor does any legislative solution for the inherent risks and foibles of market capitalism suggest itself.
Sarbox, rather, is the last gasp of a corporate governance kludge in which auditors became, in the public’s eye, something they’ve never been in their own eyes: namely proof against fraud. In the audit industry’s eyes (or at least in its behavior), the mandatory audit is a welcome gravy train that has gradually revealed an unwelcome Faustian caboose. Whenever a company blows itself up in an accounting scandal, the accountants pay for their gravy train by serving as an additional set of deep pockets for trial lawyers to sue.

So rather than encouraging beneficial risk taking that spurs economic development and job creation, Congress gives us Sarbones-Oxley, which is nothing more than a regulatory straightjacket that could well chill markets in the long run. This is a common occurrence when our elected officials pass legislation to facilitate public relations for their re-election campaigns rather than to provide a real benefit for their constituents.