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US Treasury Secretary John Snow told the Wall Street Journal last week that regulators need to take a more “balanced” approach when enforcing the Sarbanes-Oxley Law, taking care not to confuse mistakes with fraud.

"Fraud needs to be dealt with," Snow told the WSJ. "Violations of fiduciary duty need to be dealt with. At the same time, we don't want to criminalize mistakes. Getting the right balance there... is a very serious public policy issue, and failure to get the balance right has extraordinarily negative long-term economic consequences."

Sarbanes-Oxley was enacted as a way of requiring companies and their executives to be more rigorous about their accounting procedures, even to the point where senior management has to sign off on financial results at the risk of criminal prosecution and heavy fines if those results are found to be fraudulent. However, it can cost companies millions of dollars to live up to the demands put on them by the law.

"It was absolutely essential legislation, essential to restore confidence in our system of corporate governance, which had become badly frayed,” Snow told the paper. “The fraying of the system of corporate governance caused a loss of confidence and trust in capital markets. It's a precious thing. Our system of corporate capitalism can't function without confidence in capital markets and the participants in capital markets which concerns the issue of equity and debt. It depends very much on trust because nobody can vet the financial statements of the firms they invest in. So you've got to have trust that somebody is maintaining integrity and that confidence in integrity, an inherent foundation of the system, was greatly attenuated by those corporate scandals. So I think Sarbanes-Oxley was absolutely essential legislation.”
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