The Securities and Exchange Commission is closing in on an early Christmas present for corporate critics of the Sarbanes-Oxley Act - a new plan that would reduce the compliance problems associated with the legislation's prickly Section 404 auditing requirements.But the expected reforms - which are scheduled for public consideration at an SEC meeting in mid-December - are not likely to quiet the chorus of criticism from Congress and the wider business community that blames SOX for making American capital markets uncompetitive, driving stock listings overseas and creating massive new costs for small companies.

For three years now, both the SEC and the Public Company Accounting Oversight Board have been wrestling with a series of problems associated with Section 404 - the thorny provisions of SOX that call for new federal rules requiring public companies to include assessments of internal controls in their annual reports.

Earlier this year, the SEC proposed extending the 404 compliance deadline for both small-firm "non-accelerated filers" and for foreign private issuers that are not large accelerated filers. Under the proposed rules, the initial compliance date would be moved from fiscal years ending on or after July 15, 2007, to fiscal years ending on or after Dec. 15, 2007.

In addition, the SEC proposed extending the date by which non-accelerated filers must begin to comply with the 404 requirement to the first annual report for a fiscal year ending on or after Dec. 15, 2008.

But even so, critics of the costly new auditing requirements say that the SEC's action has only temporarily delayed the crushing expense of these rules for small businesses.

Several bills have been introduced to reduce the scope of SOX; Treasury Secretary Henry Paulson supported the recent creation of a new panel - comprised of business leaders and academics - to study whether SOX is discouraging U.S. companies from raising capital; and small business groups have called for an outright exemption from the 404 audit requirements for their members.

Earlier this year, the SEC asked for, and received, suggestions from the accounting profession and the business community on 404 reform, and the commission is expected to detail its response at the December meeting.

Guidance, not relief

Some SEC insiders, however, have already suggested that small-business SOX critics are likely to get more "guidance" than "relief."

In tipping her hand during a recent address to the American Law Institute/American Bar Association Sarbanes-Oxley Institute, SEC commissioner Annette Nazareth offered sympathy for small filers, but no 404 exemption. "I do not think that a wholesale exemption for smaller companies from Section 404 is an appropriate solution," she told attendees. "I believe that we should issue guidance to allow for flexible and scalable application of 404 for all companies," she added, noting that "there should not be a second tier for the integrity of a company's internal controls."

Although SEC chair Christopher Cox has vowed to issue new "proposed guidance to management" on Section 404 compliance "before the end of this year," Nazareth suggested that it might take longer for the commission to hammer out useful advice for small business. "It will take some time for the commission to develop the appropriate guidance, especially when it comes to the application of 404 to smaller companies," she said in her remarks to the lawyers.

Nazareth also cautioned against moving too quickly to correct the problems with SOX. "The Sarbanes-Oxley Act was passed with urgency in the wake of scandal - but we now have the opportunity to address implementation concerns with deliberation and prudence," she said.

PCAOB board member Daniel Goelzer struck a similar note in a recent address to the Midwest Securities Law Institute. "Just as some critics argue that Sarbanes-Oxley was enacted in haste, it would be a mistake to perform hasty surgery on the law without fully understanding what it has and has not accomplished," he said.

Although implementation of Section 404 and other Sarbanes-Oxley provisions have not been cost-free, Goelzer said that those costs have been offset by "clear improvements in public company auditing."

While audit fees have risen as a result of SOX, he argued that this is at least partially due to the fact that before SOX, accounting firms offered audit services at fire-sale prices in an effort to attract consulting business. "I think we are seeing the natural consequences of the abandonment of a business model in which the audit was a loss leader," he said.

Goelzer also dismissed arguments that SOX has encouraged companies to seek listings on foreign, rather than U.S., stock exchanges. Although he acknowledged that "New York is no longer the automatic destination for companies seeking to go public," he attributed the shift to the increased sophistication of foreign securities markets, not to new SOX-related U.S. audit rules.

The SEC's Nazareth also refuted SOX critics who blame the law for discouraging companies from listing on U.S. exchanges. Calling that a "common misperception," she said that companies would be foolish to turn down the benefits of an exchange listing in order to dodge SOX auditing rules.

Businesses "listed in the U.S. have a competitive advantage because they have access to the deepest capital pool at the least expense," she said. "The net savings in the cost of capital and the net valuation premium outweighs the costs of complying with our investor protections."

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