Alan Greenspan riffs on Sarbanes-Oxley

IDG News Service - Alan Greenspan, the former chairman of the U.S. Federal Reserve, aimed sharp barbs today at the Sarbanes-Oxley Act governing U.S. public companies.

Greenspan, who stepped down from his role at the Federal Reserve in January after 18 years, was the keynote speaker at AMR Research Inc.'s Executive Leadership Conference in Boston. In a wide-ranging look at the U.S. and global economies, Greenspan gave his take on the Sarbanes-Oxley legislation, which was implemented in the wake of major corporate accounting scandals.

A lot of financial reporting is less of a historical record and more of a forecast, according to Greenspan. "What the chief accountant creates is a work of art," he added to audience laughter. So, requiring CEOs and chief financial officers to sign off on company accounts is a good thing, he said, since they have the best sense of where the value of a business lies.

However, he described Sarbanes-Oxley Section 404 as a "nightmare" and extremely costly. That section requires a company's auditor to attest to the effectiveness of internal controls implemented to protect financial reporting systems and processes.

"What can you expect when you get virtual unanimity in both houses [of government]?" Greenspan asked. "Any bill that gets that can't be good." He said he believes that the vast majority of the members of the U.S. Senate and House of Representatives failed to actually read the bill, which passed largely uncontested in 2002.

Greenspan is hopeful that changes to Section 404 are likely, praising the efforts of Sen. Chuck Schumer (D-N.Y.) and Rep. Barney Frank (D-Mass.) seeking a re-evaluation of the legislation. Schumer was particularly concerned about New York's status as a financial center. "He was seeing [initial public offerings] going to London," Greenspan said.

Tackling the age-old question of how IT affects productivity, Greenspan noted that computer technology has radically changed some parts of the economy. In particular, companies have used IT to better track and manage inventories, he said. But Greenspan said he doubts that computerization can raise productivity at a faster level than previous technological breakthroughs.

The limiting factor isn't technology, but human intelligence, he said. "The obvious answer is we're not smart enough," Greenspan noted.

For IT to become more ubiquitous, Greenspan said more may need to be done to change the existing physical infrastructure globally. He drew an analogy with the move from steam to electric engines. Although electric engines appeared at the start of the 20th century, they didn't start really affecting the economy until 15 to 20 years later when companies tore down tall buildings designed to house steam engines and replaced them with flat manufacturing plants. The new plants enabled companies to capitalize on the benefits of the new technology.

When asked about the pros and cons of the continuing consolidation of the software industry, Greenspan pointed to the "creation of natural monopolies" such as Microsoft Corp. One of the reasons that companies such as Microsoft hold such sway is that customers are unwilling to learn new technologies after having learned to use products like the Excel spreadsheet, he said.

As a former Fortran programmer, Greenspan said he was frustrated that he couldn't immediately fix things the way he wanted to when using Microsoft software. However, Greenspan said, he eventually "gave in" and got familiar with the technology.