Sarbanes-Oxley requirements have made financial statements more confusing

The goal of the 2002 Sarbanes-Oxley Act was to make corporate accounting more transparent. In practice, a new Cato Institute study finds, the law's requirements have had the opposite effect.

Sarbanes-Oxley sought to achieve its aims by having the Financial Accounting Standards Board (FASB) mandate that corporations use Generally Accepted Accounting Principles (GAAP) in reporting their balance sheets to shareholders. In the Cato Institute Briefing Paper FASB: Making Financial Statements Mysterious, T.J. Rodgers explains why the GAAP rules complicate financial statements to the point where even CEOs have trouble reading them. Rodgers, a founder, president, CEO, and director of Cypress Semiconductor Corporation who sits on the board of several high-technology companies, uses his personal experience to illustrate how these rules obfuscate financial reports.

Rodgers writes: "The first step in the wrong direction came when FASB mandated that companies list 'intangibles' such as 'goodwill' as corporate assets, artificially inflating balance sheets. After that, FASB meddled with the revenue recognition rules, in some cases not allowing companies to report revenue from cash payments received from a customer for a delivered product. Finally, and worst by far, FASB mandated punitive and nonsensical rules for so-called expensing of stock options."

These rules, which are enforced by the Securities and Exchange Commission with the threat of criminal prosecution, have begun to take a serious toll on American businesses and markets. "The increased regulation burden makes it less attractive for venture capitalists to fund small startup companies - an economic disaster for Silicon Valley, the most prolific producer of America's technology successes," explains Rodgers.

Rodgers concludes: "FASB is a group of seven theoretical accountants based in Norwalk, Connecticut. Its Web site shows that no FASB member ever started or ran a successful business and that only one member has even held a senior position in a prominent public company other than an accounting firm.... It deeply angers me that government lawyers and naive theoretical accountants have been allowed to impair the economic miracle that democratized the silicon chip, the personal computer, and the Internet."

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