Do you think risk management systems at banks need to be stronger, and do boards need to be liable for decoding derivative risks?
Oxley: One thing that I think (Congressman) Barney Frank has been working on, which I support, is FHA (Federal housing administration) reform. That was the insurer of these kinds of loans, but because we had no documentation loans and no downpayments, FHA was somewhat irrelevant. I think just about 3% of mortgages were under FHA year before last.
So, I think legislation to reform FHA to be more effective and attractive is important.
Sarbanes: When I was in Congress, I did try and address some predatory lending practices. We were not able to move that through, but I think that needs to be looked at because there are instances in which people were being exploited.
We will also have to give more attention to developing economic literacy. More and more complex financial instruments are being developed all the time. That makes it even more difficult for ordinary investors to understand what is going on. The same challenge is faced by countries around the world.
Some critics of Sarbanes-Oxley in India say that making a company compliant with the Act could raise audit fees by 30-40%.
Sarbanes: We get the same criticism in the US and elsewhere. If a company doesn’t have a well-developed system of financial controls—a number of companies do, but some don’t—there is going to be a certain initial cost to establish such a system and put it in place. It really ought to be regarded as a capital investment because in subsequent years, the costs decline.
But you have to make sure that you meet these acceptable standards as otherwise we are taking risks with companies being listed on a public exchange.
Several Indian firms are listed in the US, but some experts say the high cost of Sarbanes-Oxley compliance has created a trend towards listing in Europe and other markets.
Sarbanes: The requirements in the European markets are beginning to parallel fairly closely with what is required in the American markets. Secondly, when you go public and are listed on the exchange, investors anywhere can purchase your stock. It becomes critical that companies provide accurate and transparent financial statements. It is part of the responsibility a company takes on when it goes public.
Oxley: A recent study by the Ohio State University and University of Toronto concluded that the foreign companies that list in the US normally get around a 30% premium on their stock valuation. And that has remained rather steady for a number of years, both pre-Sarbanes-Oxley and post-Sarbanes-Oxley.
Do you think that the financial capital has moved to London?
Oxley: No, that’s a myth. It is true that the capital markets have matured dramatically. So, companies have some options here and we have to be on our toes to provide an attractive option for them.
Sarbanes: Two basic things have happened. One is you have significant economic growth elsewhere in the world.
Oxley: Yeah, I was at the stock market yesterday here. It was unbelievable.