The mainstream business press is finally acknowledging what we have long argued: that investors, especially institutional investors who review and study the financial statements of the companies in which they invest, benefit substantially from Sarbanes-Oxley. An article in the current edition of BusinessWeek finds that "SarbOx has been a godsend" for these investors because its has produced "much more reliable corporate financial statements." Even major mutual fund managers are beginning to appreciate the Act's advantages:
[According to] Duncan W. Richardson, chief equity investment officer at Eaton Vance Management and overseer of $80 billion in stockholdings, even the act's much disparaged requirements for testing internal financial controls could drive gains in corporate productivity and profits. Says Donald J. Peters, a portfolio manager at T. Rowe Price Group: "The accounting reforms have been a win."
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Just as important, executives appear to have a firmer grasp of costs when they talk about operating margins, according to Richardson of Eaton Vance. He credits the improvement to the infamous Section 404 of SarbOx, which requires documented testing of internal controls. "Even not-so-good management teams have good controls now, and that leads to an ability to cut costs," he says.
Sarbanes-Oxley and other reforms are also positively impacting objective measures of earnings quality. Thomson Financial's Earnings Purity Index, which tracks the degree to which reported earnings are adjusted for charges and write-offs, has fallen in each of the past four years (indicating "more pure" earnings).
In light of the mounting success of Sarbanes-Oxley, we urge legislators to think twice before attempting to roll back this critical protection for investors.
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