Guilty Until Proven Innocent

Arguably, our time's most extensive piece of business legislation is the U.S. Federal Sarbanes-Oxley Act of 2002. Created to protect investors by improving the accuracy and reliability of corporate disclosures, it established a public company accounting oversight board, delineated auditor independence, corporate responsibility, and enhanced financial disclosure. Signed into law on July 30, 2002, it reviewed legislative audit requirements, and is the most significant change to U.S. securities laws since the New Deal in the 1930s.

The act originated from corporate financial scandals, including those affecting Enron, Tyco International and WorldCom (now MCI). In the latter's case, it had overstated earnings by more than $3.8B over five quarters, primarily by improperly accounting for its operating costs. The act (and its accompanying requirement for 404 Attestation) requires a publicly traded company to use outside auditors to review its entire control structure in sufficient depth for these auditors to certify that they believe the company has appropriate controls. From that point on, the CEO and CFO must personally sign every public financial statement. Overnight, in addition to the normal auditing that public companies do, the government created a $32B additional market cap industry for compliance with the act.

No one denies that Enron and others engaged in inappropriate, misleading and illegal behavior. Investors and employees were negatively impacted economically. Means designed to prevent this are necessary; however, it is individual perpetrators — human and corporate — who should be punished instead of layering another exorbitant expense on the American public. In round numbers, the Sarbanes-Oxley Act compliance requirements cost ~$100 for every man, woman and child in the United States.

The corporate cost is higher. Depending on company size, compliance with these regulations can take up to 70,000 staff hours per company.¹ Obviously, this defocuses people from the actual running of the business. Companies must price this into the product and pass on the expense to customers to sustain and grow the gross margin. And it is a yearly, not a single, instance. This ongoing expense does not grow the company; it is money that comes directly out of infrastructure building, out of hiring, out of R&D, out of new product investment, and directly out of profits. For one well-known Silicon Valley company, the cost was 3 cents per share.

Technology investment is paramount for our industry. The act has removed considerable capital that might otherwise have been invested in technology or infrastructure. Lest we forget, infrastructure is what allows us to compete globally. This legislation has reduced the U.S. semiconductor industry's capability to be globally competitive.

Those guilty of egregious acts should singularly be responsible for the cost of those acts. But this cost should not be evenly spread across all elements of industry. Broad-brush solutions for minor problems create major ones. There are 9428 public companies,² of which 20 — the Enrons, Global Crossings, WordComs, etc. — acted dishonestly. Thus, the mismanagement of two-tenths of 1% of the corporate population has forced the remaining 99.8% to support a non-productive $32B industry.

Political correctness has kept the industry — and others — from complaining about this additional burden to competitiveness. Who is willing to stand up and protest against legislation supposedly designed to force public companies to be forthright and honest in their public accounting? Getting AEA or SEMI to lobby that this legislation is wrong and restrictive will never happen. Nonetheless, entire industries should not be splattered with a broad-brush "solution" that just adds to an already bloated bureaucracy.

Sarbanes-Oxley's world view is that everyone is guilty until proven innocent, and this is wrong. Companies — particularly those involved in high tech — must be allowed to change their internal control focus from the assumption that nothing is being done right.