a small hypocrisy on the "color of authority"

Topics: Regulation
02 Dec 2005

From: Ervan Darnell

I heard a talk yesterday on the Sarbanes-Oxley law (SOX). Among other
things, it escalates the penalties against the officers of a corporation
for signing financial statements that do not meet all reporting
requirements. That is, they are held personally and criminally liable
for the failure of employees within their corporations, not merely their
own fraudulent acts.

Contrast this with suing a government. Some suits against the
government are simply not permitted under the doctrine of sovereign
immunity [1] (while corporations enjoy no such luxury). And even where
allowed, the individual in the government is generally protected under
the notion of "color of authority".

The government cannot resist the temptation to exempt itself from its
own laws.

In fairness, police can sometimes be sued for egregiousy bad behavior,
but then usually it's the department that is sued. And, it's up to the
individual do bring suit, the feds are not likely to help. In the SOX
case, it will usually be the federal government applying its deep
pockets of investigatory authority to chase individuals in private
companies. Regardless, try suing the attorney general for violating
your constitutional rights, even knowingly trying to violate them. You
might get the action overturned in court, but you won't get him or her
punished personally. SOX targets individuals in a company, even when
they intended no harm personally. I wouldn't necessarily remove the
idea of "color of authority", but I do see a hypocrisy in its application.

Incidentally, there is an effort under way to expand SOX to
non-profits. Given the huge compliance costs (currently estimated at
$30G/year in extra accounting costs for public companies), this would be
a disaster for charitable causes. The idea in the first place was to
increase transparency for investors, something of almost no relevance to
non-profits in any case. It also discourages companies from going
public, especially small ones for whom the compliance costs are higher.
For a law that was meant to increase the transparency of public
companies a little it has some of the opposite effect of keeping
companies from ever going public in the first place, thus decreasing
transparency a lot (for a subset of companies). I don't see corporate
transparency as always a good thing, but I'm just pointing out the
unintended consequences of the law.

[1] http://en.wikipedia.org/wiki/Sovereign_immunity
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