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During his first weeks in office, President Trump took steps to correct what he perceived to be an oppressive financial regulatory system that he claims is inefficient, ineffective, and stifles American economic growth. Specifically, President Trump took aim at the Dodd-Frank Act, which was passed to provide financial consumers with greater financial protections, and suggested he would take steps to repeal Sarbanes-Oxley, which was passed in response to financial accounting scandals that hurt consumers.
The Sarbanes-Oxley Act was originally presented in the Senate as the “Public Company Accounting Reform and Investor Protection Act” and was passed in 2002 in response to major accounting scandals at Enron, WorldCom, and Tyco. Prior to Sarbanes-Oxley, tax auditing firms, who served as the primary watchdogs for financial investors, were largely self-regulating. But in addition to financial audits, they also performed significant non-auditing and consulting work, often for the same companies they were tasked with auditing. The consulting work was often more lucrative than the auditing work, which created at least the appearance of a conflict of interest.
Congress passed Sarbanes-Oxley in response to highly publicized cases of accounting fraud at some of America’s most well-known companies. The Act created additional responsibilities for the directors of public companies, and created criminal liability for certain financial misconduct. Specifically, Sarbanes-Oxley requires top management of public companies to certify that financial information is accurate, and provides severe penalties for fraudulent financial activity.
Critics claim that Sarbanes-Oxley unduly burdens public companies with onerous reporting requirements and discourages investment, both of which negatively impact job growth and the American economy.
During the presidential campaign, President Trump promised to usher in an era of pro-business regulations that would make public financial markets more accessible to private companies by reducing regulatory barriers. Specifically, he indicated that he wants to repeal Sarbanes-Oxley. In February 2017, President Trump issued an executive order entitled “Core Principles for Regulating the United States Financial System” in which he tries to make a case for more efficient, effective, and appropriately tailored financial regulations.
Those in favor of seeking to repeal Sarbanes-Oxley complain that compliance is expensive and burdensome, and deters companies from going public, which results in a loss of capital that negatively impacts job creation and the economy. They argue that government regulation is choking off businesses, which kills job growth.
Investors complain that under Sarbanes Oxley capital is invested but the return on the investment is slow to realize. Because investors are more selective in their investment choices, the argument goes, we are stifling innovation as investors are reluctant to invest cash in the marketplace.
Those who want to repeal Sarbanes-Oxley argue that the financial world has changed significantly since 2002, and that the abuses Sarbanes Oxley was enacted to prevent are significantly less possible, largely due to electronic safeguards that are now commonplace. For example, transactions that were done by humans have now largely become electronic.
The concern over Trump's promise to repeal Sarbanes-Oxley is that it could undermine many of the corporate responsibility principles we take for granted today, many of which are rooted in the Sarbanes-Oxley Act. In many ways, Sarbanes-Oxley represents the proverbial “thumb in the dike” - and once President Trump starts repealing parts of Sarbanes-Oxley, the entire statutory framework of consumer protection against overreaching in the financial sector could come crashing down.
President Trump will almost surely make some headway in reducing the perceived burdens imposed by Sarbanes-Oxley. Companies and investors will likely see an easing of corporate and securities regulations, and less aggressive regulatory enforcement than was present under President Obama. However, there will likely be significant push-back against an effort to completely repeal Sarbanes-Oxley, and any changes to enforcement of Sarbanes-Oxley are likely to be small and incremental.
If you have questions about the proposal to repeal Sarbanes-Oxley, or are concerned about how less-stringent financial regulations might affect your job or financial future, contact the Kansas City whistle-blower attorneys at Brady & Associates today. Call us at (913) 696-0925 or complete our online contact form.
* Photo by Michael Vadon, used with permission under the Creative Commons Attribution-Share Alike 4.0 International license.