A recent agreement between Facebook and Goldman Sachs to create a special investment vehicle has raised questions as to whether Facebook is attempting to receive the benefits of broad investment without the downsides of being a publicly traded company. With all such discussions, it does not take long for both sides to bring up Sarbanes-Oxley and the costs of being a public company.
What is the answer? As an accounting professor, it is difficult not to say that more accounting and disclosure will result in better functioning capital markets! The Securities and Exchange Commission was created with the idea that, if investors have more complete information that is audited by an independent third party, they can make better decisions. Providing this information and having it audited costs money. Some are concerned these costs keep the Mark Zuckerbergs of the world on the sidelines, limiting their incentive to create new technologies, companies and jobs.
The difficulty is measuring the benefits of increased regulated disclosure. In an academic study, Jefferson Duarte, Stephan Siegel and Lance Young conclude that the increased quality of information and higher audit standards has increased the market cap of U.S. companies by 2 percent; for a company such as ExxonMobil, that translates to $7.6 billion of value. As valuable, but equally difficult to measure, is the cost of another Enron or WorldCom bankruptcy, whose combined market value was more than $260 billion at their peaks Ask those shareholders if they would have like to have had better accounting information and more rigorous audits, despite the cost.
As additional private companies like Facebook seek capital through sources other than the U.S. public capital markets, the issues of Sarbanes-Oxley, regulation and incentives will continue to be raised. Yes, our capital market system imposes regulation and costs on companies. And yes, at least some of those costs are necessary to protect investors and provide them with more reliable information.