The current debate about the Sarbanes-Oxley Act may prove to be an object lesson in how short memories in Washington can be. I hope that isn't the case, and that the tone and content of the discourse is focused where it needs to be - on protecting investors and the markets. The Securities and Exchange Commission and the Public Company Accounting Oversight Board are exploring ways to make the law more efficient and cost-effective. In early April, they approved a framework that will build more leeway into the way that parts of the law are implemented. While there are no final decisions, investors need to take heed: Some of the proposals, in implementation, could have the unintended effect of watering down the protections created by SOX.
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The Center for Audit Quality, formed by the public company auditing profession to help foster confidence in the audit process, supports making the company assessment and related auditor attestation about internal controls over financial reporting both cost-effective and efficient, and we have been active supporters of necessary reforms. But change cannot come at the expense of the investor protections that have made the law successful in the first place.
In fact, before policymakers consider rolling back parts of the act, they should consider the extent to which it has helped restore investor confidence.
When the law was enacted, Gallup measured investor confidence at 31 percent - and some $5 trillion had disappeared from the capital markets since the stock market's peak in the late 1990s. Investors were skittish: Enron and WorldCom proved that dishonest people could conspire to enrich themselves and cheat investors who relied on the markets to help pay for college, save for retirement and live out the American Dream.
Sarbanes-Oxley has created an atmosphere where it is much more difficult - and risky - for those with an intent to mislead investors to game the system. Last fall, Gallup found that 54 percent of those surveyed have confidence in the markets. That is the highest total since the 1990s boom.
In their efforts to strengthen and clarify the law, regulators have come up with several useful and interesting proposals, including ones that more clearly delineate the obligations of company officials and their auditors. Preliminary evidence suggests that the cost of complying with SOX declines from the first year to the next as companies - and their auditors - become more familiar with the law's requirements.
But creating efficiencies and lowering costs shouldn't come with creating different standards. It is important that both the accounting standard and management guidance retain their proposals for scalable standards and audit requirements for all companies, based on their size and complexity. Reporting shouldn't be based on size alone, and smaller companies shouldn't be exempt from the standards altogether. These companies receive nearly one in every four dollars invested in U.S. capital markets. Investors deserve to have the same confidence in companies' financial reporting, whether large or small, simple or complex.
Giving smaller companies a pass on some requirements would not only strip investors' protections and create the potential for confusion - it also could be bad for companies.
And I am not alone on this point. Last year, 261 financial executives interviewed for the Oversight Systems Financial Executive Report were clear: With investors now expressing more confidence in financial reporting, they don't want any relaxation of standards for smaller companies.
And, ultimately, investor confidence is what this is all about. Investors are entitled to credible assurances about the financial records they rely on in making investment decisions. This should be true whether they're investing in large companies or the smaller start-ups that are the backbone of our economy. Subjecting those companies to the same requirements as larger companies will help, not hinder, their growth.
Cindy Fornelli is executive director at the Center for Audit Quality, and formerly served as deputy director of the Securities and Exchange Commission's Division of Investment Management.