Sarbanes-Oxley, the controversial American corporate governance law introduced after the collapse of the energy giant Enron, has survived a major legal challenge at the US Supreme Court.
Campaigners against red tape, who claimed the law hurt American competitiveness and deterred global corporations from listing in the US, had hoped that a challenge to a key part of the legislation could bring it down in its entirety.
But in a ruling handed down yesterday by the country's constitutional court, the Supreme Court justices decided that a minor problem with one part of the law did not mean the legislation was unconstitutional as a whole.
The Sarbanes-Oxley Act subjected US companies to much greater accounting oversight and put new obligations on auditors to help root out fraud. The bankruptcy of Enron in 2001, after revelations of massive accounting fraud and audit failure at the company, shocked the US public, and pressure for tough new regulation mounted only the following year with another big fraud and bankruptcy, that of the telecoms company WorldCom.
The Act, named after the two senators who drew up the legislation, was signed into law on 30 July 2002. It applies to any company with US shareholders, and was criticised by business for adding millions of dollars in annual costs, or tens of millions for larger corporations. ITV, O2 and Rank were among the British companies that delisted their shares from US exchanges to escape the clutches of the law.
The Act also made executives of US-listed companies criminally liable for the accuracy of their companies' accounts, and it created a Public Accounting Oversight Board within the Securities and Exchange Commission, with which all auditing firms had to register.
A campaigning investment manager called the Free Enterprise Fund and a Nevada accounting firm challenged the structure of the board, saying it was unconstitutional because members were not properly accountable to the White House or to Congress. In a split ruling, the Supreme Court agreed the President ought to have more power over membership of the board, but it dashed the hopes of campaigners, saying in its judgment: "With the tenure restrictions excised, the Act remains fully operative as a law."
John Berlau, a director at the Centre for Competitive Enterprise, a right-wing campaign group that petitioned the court, said an out-of-control board had introduced layers of red tape, requiring auditors to "scrupulously examine trivial items with little relevance to shareholders, such as who has the office keys and how many letters are in employee passwords".