Sarbanes-Oxley Reform in the Future?

Secured Lender, The, Jan/Feb 2007 by Cove, Brian P

Enacted in 2002 in response to the collapse of Enron and Worldcom, the Sarbanes-Oxley Act has had its share of supporters and detractors. Supporters laud the law for making U.S. corporations accountable and for restoring investor confidence. Critics have derided the law for placing costly and onerous reporting and auditing burdens on these same companies. In recent months there has been a steadily growing chorus of calls from large and small U.S. public companies for reform of the law.

With Democrats winning a majority in both the House and Senate in November's elections, the prospects for reform of Sarbanes-Oxley is uncertain. However, the incoming Speaker of the House, Representative Nancy Pelosi (D-CA), has publicly called for changes to Sarbanes-Oxley, particularly related to provisions that affect smaller companies. Representative Barney Frank, the Massachusetts Democrat who will become chairman of the House Financial Services Committee when the new Congress convenes in January, has indicated that he believes some provisions of the law should be modified to ease the compliance burden on U.S. companies. The position of his Senate counterpart, Christopher Dodd of Connecticut, the new chairman of the Senate Banking Committee, is less clear. Senator Dodd has publicly stated that, while his committee will look into the law at some point, he believes the negative impact of the Act has been exaggerated by businesses and he is not yet convinced that compliance with the law is too costly. The outlook for legislative reform of the Sarbanes-Oxley Act will become clearer once Congress reconvenes in late January. Given the statements of the incoming Democratic leaders in the House and Senate, it does appear likely that the law will become the focus of Congressional scrutiny in 2007.

In the Executive Branch, support for reform of the law is strong. In November 2006, Treasury Secretary Henry Paulson, in a speech to the Economic Club of New York widely covered by the financial and mainstream media, stated that compliance with Sarbanes-Oxley has proven to be a costly burden on U.S. businesses and that the law should be interpreted in a more flexible manner to reduce compliance costs. Echoing these sentiments, securities and Exchange Commission (SEC) Chairman Christopher Cox has indicated that the SEC, in response to complaints from U.S. businesses that Section 404 of the Act is particularly burdensome, will unveil significant changes to the law at the December 2006 meeting of the Commission.

Section 404 of the Act requires publicly-traded companies to review and assess internal controls that are in place to ensure accurate reporting of the companies' financial information. Many companies have charged that section 404 has been interpreted too broadly by the sec, forcing companies to expend significant money and resources to comply. A 2005 study by the trade group Financial Executives International concluded that compliance with Section 404 cost U.S. companies, on average, $3.8 million.

In November 2006, Chairman Cox urged the Public Company Accounting Board to revise its auditing rules to take into account the size of the company whose books are being audited.

While ti remains to be seen if there will be legislative action to soften the requirements of Sarbanes-Oxley in the new Congress, it appears that the SEC will take the lead with its proposals to ease the compliance burden of Section 404. Check Frontline in the March/April issue of The Secured Lender for details of the SEC proposal.