Keep up the heat on Sarbox

Chief Executive, The, April-May, 2006

CHIEF EXECUTIVES of large public companies have dealt with the Sarbanes-Oxley Act of 2002 and moved on. But nearly 80 percent of all publicly traded companies, accounting for 6 percent of total U.S. equity market capitalization, are still wrestling with it.

A moment of truth is at hand. The Securities and Exchange Commission established an Advisory Committee on Smaller Public Companies to advise it on how to apply Sarbox to these smaller companies. The advisory committee will make a final report to the SEC in late April but has released an early draft.

Although generally supportive of easing the pain of Sarbox, the draft report suggests a new test for whether Section 404, which mandates internal controls that can be tested by outside auditors, should be applied. Companies with less than $250 million in sales would get relief, but any company larger than that would not.

This is a sticking point and chief executive should be demanding that all these companies get relief from a hugely expensive, time-consuming process, which ultimately does not guarantee that fraud won't occur.

Although Sen. Paul Sarbanes recently denied that Sarbox was enacted in haste, the evidence is overwhelming that the law overshot the mark.

The latest evidence is the results of Chief Executive's polling of its readers. More than 90 percent of some 193 respondents said they would prefer to manage their companies as privately held entities, far from the scrutiny of the stock exchanges and SEC. (See Confidence Index, page 22.) Some readers said public companies have to spend 30 to 40 percent more of their time on compliance and financial market requirements than privately held counterparts. Rather than putting up with Sarbox, CEOs of smaller public companies are tempted to go private or stay private. That will bring less transparency to the markets, not more.

So keep up the heat on the SEC. And if the Free Enterprise Fund's suit against the Public Company Accounting Oversight Board moves forward, there may be even more opportunity for relief from Sarbox. After all, if the PCAOB is ruled unconstitutional, then the law that created it will have to be revisited.