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Congress Went Too Far, Should Learn Its Lesson

Looking back at the Sarbanes-Oxley Act of 2002 (Public Law 107-204) reminds me of a typical practice of Congress — to do nothing or to overreact. In a reaction to a serious financial crisis, Sarbanes-Oxley was intended to bring reliable transparency to financial disclosures and instill confidence in the financial marketplace. At the time, it seemed like the proper and logical solution to prevent further corporate disasters, like Enron. However, five years later, we are still trying to untangle some of the unintended consequences of this legislation.

I was not in Congress when the Sarbanes-Oxley Act of 2002 was enacted into law. I was operating a small business back in Texas, and because of this, I believe I bring a different perspective to this debate than some of my colleagues.

From my perspective, the most significant impacts of Sarbanes-Oxley were the effects it had on the smallest publicly traded companies and on America’s global competitiveness. I am a firm believer that small businesses are the lifeblood of the American economy, and to regulate and burden them with costly and reactionary laws only hurts these businesses and discourages those with aspirations from opening one.

Most conspicuously, Sarbanes-Oxley has discouraged private companies from going public and has encouraged many companies to turn back and go private. Combine this with the fact that many foreign companies are no longer willing to list on our nation’s stock exchanges, and you can see how one piece of legislation, laced with good intentions but lacking foresight, can severely damage the American economy and our global competitiveness.

Thankfully, the Public Company Accounting Oversight Board and the Securities and Exchange Commission have taken actions to correct some of these negative effects on our markets. For example, the PCAOB recently approved Auditing Standard No. 5, which is designed to increase the scalability of auditing standards while reducing unnecessary costs, especially for the smallest publicly traded companies. As we begin to phase in compliance standards for these companies, this is a good approach.

This new standard is half the length of Auditing Standard No. 2 and is much easier to understand. The mandatory auditing requirements that existed before have been significantly reduced; this way the auditor can perform a test when necessary, based on sound judgment and not government regulations.

Finally, Auditing Standard No. 5 will ensure that auditors do not waste time or money on areas of low risk, but instead focus only on areas of high risk. This provision clarifies that management’s process is not the focus of the audit, but rather the audit is focused on the effectiveness of a company’s internal control over financial reporting.

Clearly, the implementation of Auditing Standard No. 5 is a step in the right direction. Moving forward, however, it is my hope that Congress will learn from the mistakes of Sarbanes-Oxley and not rush to pass legislation when facing similar market “crises.” As we grapple with how to deal with the current turmoil in the housing market, this is a good lesson to remember.

I often say that our financial markets are efficient, but not always kind. Thus, I believe in market-based solutions rather than burdensome government solutions to solve market problems.

That is why I am concerned that the Financial Services Committee, on which I serve, is considering legislation to regulate the mortgage industry. The housing market in the United States is the envy of the world and has led the way to record home ownership. Therefore, we must tread lightly and have the foresight to consider the long-term consequences before interfering with the marketplace.

Although there will be periods of instability, the markets will self-correct without government intrusion. As we have seen in the past, government solutions do not always work, and government infringement is not always the answer.

As we continue to work out these problems, I believe Congress should do more to engage industry leaders to find market-based solutions. Let industry approach Congress if they believe a government intervention is necessary, not the other way around. By doing so, we can ensure that we will avoid the mistakes of the past and the unintended consequences of overreaction.

Rep. Randy Neugebauer (R-Texas) serves on the Financial Services Committee, where he is the deputy ranking member.