by Ken Rankin

Washington - Despite complaints from some business groups that Sarbanes-Oxley accounting reforms have put a chill on entrepreneurial activity, Securities and Exchange Commission Chairman William H. Donaldson told Congress that corporate America is warming up to the tougher new financial reporting standards of the sweeping legislation.

During “my discussions with company officials, countless people have told me that America cannot afford a return to the lax standards that preceded Sarbanes-Oxley,” he said in testimony to the Senate Banking Committee. “Many have added that, while they initially questioned the merits of the act, they now see that it can help show the way to a brighter, more competitive era in American business.”

Donaldson’s testimony came during the opening round in a series of upcoming congressional hearings into the effectiveness of Sarbanes-Oxley, and whether the costs of complying with the year-old act are short-circuiting the country’s entrepreneurial drive.

One factor that may be working against efforts to improve financial reporting, however, is the increased concentration of the accounting industry - particularly firms that conduct audits of public companies.

Responding to questioning from Sen. Christopher Dodd, D-Conn., Donaldson conceded that fewer accounting firms would result in less competition for audit services.

“The challenges facing the accounting industry are considerable,” he told the committee. There are “tremendous competitive issues” facing the profession, and “the fact that we have only four major accounting firms is a concern.”

Donaldson’s assessment of the dearth of global public auditing firms comes on the heels of a General Accounting Office report that classified the Big Four’s grasp on the public-company auditing arena as a “tight oligopoly,” as four firms audit 78 percent of all public companies.

The report even intimated that for fear of another major firm collapse following an massive scandal - ˆ la Andersen - any criminal charges should be weighed against the possibility of a further reduction in public company audit competition.

However, even staunch supporters of Sarbanes-Oxley acknowledged that the new regulatory burdens associated with the act have put pressure on the business sector.

During the hearing, Sen. Charles Schumer, D-N.Y., asked Donaldson whether he worried about “a decline in the entrepreneurial vigor” of U.S. corporations because of the new accounting rules.

Donaldson said that while “there have been suggestions” that tougher enforcement of the financial reporting rules may “have discouraged honest risk-taking,” he called on corporate leaders not to use “Sarbanes-Oxley as an excuse for putting off innovation and investment.”

Nothing in the law, “its implementation or in the commission’s agenda should make business fearful,” Donaldson told the committee.

“I believe the act and the other steps that have accompanied it will lead to an environment where honest business and honest risk-taking will be encouraged and rewarded,” he said. “What should be discouraged, and what we are committed to stamp out, are the activities that some have sought to disguise as honest business but that, in reality, are no such thing.”

Donaldson’s point was echoed by Committee chair Sen. Richard Shelby, R-Ala., who disagreed with critics of the law who contend that Sarbanes-Oxley has made businesses overly cautious and discouraged risk-taking.

“The act does not penalize risk-taking, but rather promotes transparent and honest business practices,” he said. “Although Sarbanes-Oxley was enacted only one year ago, it has already caused beneficial changes in corporate practices.”

The committee chair also defended the act from charges that the costs imposed on business by the law are excessive. These regulatory costs “were necessary to address the surprising erosion of business principles and lack of investor confidence,” Shelby said.

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