Does Sarbanes-Oxley Reduce Innovation?

25 January 2007 at 1:02 am 1 comment

| Peter Klein |

Thanks to Sarbanes-Oxley, Apple customers can’t take advantage of faster wi-fi cards without paying an extra fee. That’s Apple’s explanation, anyway:

With a quick software update from Apple, customers’ “g” machines would become “n.” Voila, a surprise instant upgrade that means happy customers and good karma for Apple. . . .

According to Apple, however, accounting rules have complicated matters. . . . On the one hand, if it had announced that its computers were shipping with n-capable cards that would be activated later, it would have had to wait to record some of the revenue garnered from each computer until it actually activated the feature. That would have been an accounting nightmare. On the other hand, not having acknowledged the feature when the machines first shipped, Apple can only count it as a valuable feature if it charges users for activation. That way, the original product was “complete,” and accounting rules let Apple count all of the revenue when the machines were sold — the intuitive, straightforward accounting approach that a reasonable observer would expect. . . .

The rule that made Apple’s mess predates Sarbanes-Oxley — but Sarbox’s stiffened penalties may well have changed Apple’s calculus.

This is from a piece in the current issue of Writer Jerry Brito also quotes Jim Clark’s letter resigning from the board of Shutterfy:

Sarbox dictates that I not Chair any committee due to the size of my holdings, not be on the compensation committee because of the loan I once made to the company, not be on the governance committee, and it even dictates that some other board member must carry out the perfunctory duties of the Chairman. . . . What’s left is liability and constraints on stock transactions, neither of which excite me.

Entry filed under: - Klein -, Classical Liberalism, Management Theory.

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1 Comment Add your own

  • 1. Gary Peters  |  25 January 2007 at 7:22 pm

    There is no question that the Accounting profession continues to heavily debate whether the provisions in SOX went to far (valid arguments on both sides). Executives are also paying much closer attention to the criminal penalties emphasized in SOX. As far as “stifling innovation” goes, many opponents of SOX are questioning whether the costs of raising capital in the U.S. has overly burdened entrepreneurial and small-business activites.

    On the Apple case, I am an accountant and even I had a hard time following this one. However, my guess is that Apple is using this as a cop-out. It sounds like Apple was simply running the risk of promoting the “n” card before it became ratified. Imagine what would happen if Apple had told consumers “buy our machines with the latest and greatest “n” card” and then subsequently the n card was not ratified. The accountants would then be reversing a large amount of revenue because angry customers would be returning the machines in droves because they did not meet expectations. Accounting rules are established to report Revenue less “projected” returns and refunds. Many times returns and refunds are immaterial and thus this issue isn’t pressed. However, the rules ultimately are aimed at preventing abuse by companies attempting to inflate revenue.

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