Cox to Head SEC, Sarbanes-Oxley, and SFAS 123

Christopher Cox (R-CA) represents the district where CalculatedRisk lives. I suspect both of us are mulling over whether he is the best choice to be the new SEC chairman. Robert Novak does not make a good case for this Presidential nomination. Just as gets the issues in the Andersen litigation wrong, he tries to make whether we have transparent and honest accounting a partisan issue. Shorter Novak – Republicans support dishonest CEOs as they are the only ones who can create new jobs. I think this is unfair to many Republicans who likely agree with Al Hunt. The close of their debate was classic:

NOVAK: I’m going to send you some editorials from your old publication, “The Wall Street Journal,” showing what a danger and what a threat to corporate America and – who create the jobs. You guys don’t create the jobs; the corporations do.
HUNT: And Bob, I will then send you some very good news stories from “The Wall Street Journal” that were frankly – hope would inform and edify you, because they really are far more in-depth and far more substantive, and that is the last word.

Lawrence Kudlow makes a better case for this nomination that included the following statement, which will likely be controversial:

While the Californian will certainly not roll back the anti-fraud Sarbanes-Oxley provisions designed to tighten corporate accountability and financial management, he is likely to reinterpret some SEC rules in a much more investor- and business-friendly manner than did his predecessor William Donaldson. At times, Donaldson appeared to be contributing to an overly hostile regulatory climate for business. Watch Cox reverse this environment in his first 100 days. That said, Cox will insist on honest accounting and complete accountability from chief executive and chief financial officers. There will be no opening the door to number-fudging under Cox. But just as surely, a number of costly paper-work burdens will be reduced.

While the spirit of Sarbanes-Oxley was clearly needed, David Altig has been arguing that the Big Four accounting firms have perverted this spirit in creating a fee generating regulatory burdens. Rent-seekers of the world unite?

Alas, Kudlow had to spoil an otherwise interesting NRO op-ed with:

He’s also no friend of the immediate expensing of options. Instead he believes that free markets are efficient and are constantly pricing in options expenses. Black-Scholes-type option-pricing models are Sarbanes-Oxley overkill. Cox has little sympathy for them, according to Washington analyst James Lucier.

Of course, investors factor in publicly available knowledge of revenues and expenses in the pricing of stocks. But that is the whole point in calling for honest and transparent accounting. Enron’s stock price factored in the known obligations of the company. Halliburton’s stock would have been properly valued had the accountants for Richard Cheney’s company known about the change in the accounting method. And the whole point behind SFAS 123 was to provide investors with timely and reliable estimates of the cost of issuing stock options. FASB lost the first battle to mandate that these expenses be placed on the income statement, but the 10-K footnote option provides the savvy investor with information at least on an annual basis. While most financial economists would agree that the textbook version of Black-Scholes tends to overstate the true value of employee stock options, SFAS does not mandate the textbook version be used. I just hope Cox has a clearer understanding of this issue better than Kudlow.

Update: With thanks to CalculatedRisk here is the Washington Post editorial on the nomination of Congressman Cox to head the SEC.