The Trump administration and congressional Republicans seem intent on peeling back some basic regulatory framework introduced by the Sarbanes-Oxley Act in 2002. They argue that the burden on companies is too heavy and, by removing the regulations, corporations would be free to invest, expand, and grow the economy.
The arguments are understandable but ultimately unconvincing. For large corporations, the amounts they devote to compliance are proportionately trifling, and some of the biggest coherent additions to the regulatory framework happened at the start of what would become share increases in corporate profits.
What Is On The Chopping Block
You may have never heard of the PCAOB, or Public Company Accounting Oversight Board. It was part of the Sarbanes-Oxley Act of 2002, a whiplash response to the dot-com implosion and the massive financial fraud by such companies as Enron, Adelphia, and WorldCom, that was a part.
To give a sense of how bad it was, in 2003, I wrote about the challenges replacement CEOs at such companies faced in trying to stabilize the businesses. One example was Bill Schleyer, an experienced executive and venture capitalist with an MBA from Harvard, who became chair and CEO of Adelphia Communications. He told me about his experience listening to the head of accounting talk about the previous management bookkeeping. “I thought he was joking,” Schleyer remembered. “I didn’t think that anyone could be that Machiavellian to dream up those accounting practices.”
Sarbanes-Oxley was unusual among many regulatory packages as it focused on financial reporting accuracy and executive accountability, according to Accountinginsights.org. That includes chief executive officers and chief financial officers signing off on the accuracy of financial statements. (There were many complaints from corporations at the time about the sign-off requirements. It’s impossible to read people’s minds, but perhaps an aversion of top executives to personal guarantees of produced information might have had something to do with it.)
It’s not the first time people have tried to eliminate the PCAOB. The first Trump administration had undertaken a “virtual gutting,” as Forbes contributor Robert G. Eccles wrote in 2021.
Why Major Regulations Are Important
AccountingInsights notes that the PCAOB has had a positive impact by creating a “shift towards a more rigorous and structured approach to auditing.” The body has emphasized corporate internal controls and risk factors, “requiring auditors to adopt a more analytical and skeptical mindset.”
The quality of audits is of particular import for the public markets. They help ensure better information and transparency that investors, large and small, use to better their portfolios and strategies. The PCAOB announced in March 2025 the results of inspections in 2024. The aggregate deficiency rate of corporations audited by the six U.S. Global Network Firms dropped eight percentage points, from 34% in 2023 to 26% in 2024. The aggregate rate for the firms audited by the four largest firms dropped six percentage points from 26% in 2023 to 20%. Those Big Four firms audit about 80% of the market capitalization of public companies listed on exchanges.
Companies may complain about regulation, but contrary to their criticisms, regulations seem to help improve profits. Below is a graph from the Federal Reserve Bank of St. Louis. It shows pre-tax profitability of U.S. corporations at different times.
The gray bars are periods of recession. Notice how post-recession growth more or less continued a longer pre-recession trend until after the 2001 recession. As the country exited that period, growth in corporate profits hot upward at a quick pace. That started around when the U.S. passed Sarbanes-Oxley into law.
Another example is how the country came out of the Global Financial Crisis. The Dodd-Frank Act, which was the regulatory reaction to the excesses and risky behavior that had just passed, was signed into law in 2010. At the same time, there was another sharp boost in corporate profits.
There is no way to show that Sarbanes-Oxley or Dodd-Frank was the cause of the profit growth spike after each, but it is clear that, at least, neither seemed to inhibit business.
Dr. Albert Schweitzer, the famous physician and humanitarian, was also a musical scholar and organist. In his two-volume biography of Johann Sebastian Bach, he discussed the difference between what he called object art and subjective art. In music, he said that musicians who redefined forms and rules were subjective artists. By that, he meant they changed things around them to create. Bach, however, was, in Schweitzer’s eyes, an objective artist. He followed strict rules that pushed him into himself where he worked around the restrictions to create things that had never been heard before.
Perhaps financial regulation is similar. Corporate executives and boards want flexibility to do what they wish, but that doesn’t focus innovation and strategy the way needed regulations did. Wiping away what has been successful is a mistake, no matter how many businesspeople want to eradicate constraints on themselves.
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