Still more costs of SOX: foreign firms, and managing by the numbers

Saturday's WSJ discusses the transformation of stock exchanges around the world. The story points out:

Many foreign companies say the U.S. has become a much less appealing place to list shares. They're put off by rules for public companies introduced in reaction to corporate scandals -- in particular, by the Sarbanes-Oxley law's requirement that top executives attest to the veracity of financial filings and install internal controls to prevent fraud.

A Russian securities executive says "Mr. Sarbanes and Mr. Oxley have obviously contributed to the decision-making process. It is obvious that regulatory changes have influenced foreign companies' listing decisions."

Tom Kirchmaier and Mariono Selvaggi, in The Dark Side of 'Good' Corporate Governance: Compliance-Fuelled Book-Cooking Activities point out a little noted perverse effect of SOX internal controls reporting:

We argue that obligatory compliance with stricter financial reporting rules (e.g., the US Sarbanes-Oxley Act) may entail important unintended consequences. Paradoxically, the amount of misreporting may increase because corporate boards spend more valuable resources fulfilling statutory mandates rather than involving themselves in forward-looking strategy setting. As these surveillance devices are substitute methods of gauging management quality, when boards focus on the firm's internal control and accounting system they become semi-detached from strategy - their business acumen falters. Top executives are then judged primarily on the basis of financial metrics as opposed to long-term fit. As the balance sheet review carries more weight in the board's decision-making process, the return to managerial book-cooking (a purely influence activity) and the risk of endorsing flawed business plans swell.

Henry Butler and I discuss similar problems with SOX in our Sarbanes-Oxley Debacle, rolling off the presses at AEI.