Sarbox on Ice?

True or false: The SEC, the PCAOB, and Congress are lightening up on Sarbanes-Oxley and legal liability.

Although it’s not even five years old, there’s no question that the Public Company Accounting Oversight Board has seen better days.

Currently the target of a lawsuit that threatens its existence, the PCAOB has also been criticized by its boss, the Securities and Exchange Commission, for burdening Corporate America via excessive internal-controls rulemaking. Caught amid an apparent widespread counter-reaction to post-Enron reforms, the oversight board has become a poster child for over-regulation.

Indeed, if the plaintiffs in the lawsuit get their way, the PCAOB—and the Sarbanes-Oxley Act that spawned it—will no longer exist. In late December, a U.S. District Court judge heard arguments from both sides in the case against the accounting board. The plaintiffs, who contend that the PCAOB setup violates the Constitution, think that if they dismantle the board, all of Sarbox will tumble in the legal wake. While the judge is likely to hand down a ruling as soon as in March, Michael Carvin, a Jones Day attorney representing the plaintiffs, told recently, the case will almost surely be appealed by the losing side and end up in the D.C. Circuit Court.

Assuming that the board hangs around for awhile, though, it’s sure to find itself on a short leash. For years, the SEC has faced heavy pressure to make the rules under Sarbox 404, which covers internal controls over financial reporting, cheaper and less burdensome for smaller companies. The commission responded late last year with new guidance on how corporations should comply with the rules and apparently pushed PCAOB to get with the program and revise its own controls standard for auditors, AS2.

Further, SEC members have laid the blame for the 404 brouhaha squarely on the accounting board’s brainchild. With the SEC failing to provide guidance until it issued its recent proposal, senior finance executives and controllers defaulted to AS2 as the key compliance guideline.

And that, the comissioners contend, led to disaster. “We had an atmosphere in which what-if scenarios created mountains out of molehills — a control failure for a $500 error could be just as significant as for a $50 million error,” Commissioner Paul Atkins told the Corporate Directors Forum in San Diego on January 22. “And, we had companies being told to document, analyze, and create process charts for literally tens or hundreds of thousands of supposedly key internal controls — and those numbers are for individual companies, not the market as a whole.”

Even the president got into the act in a speech on Wall Street on Wednesday. “We don’t need to change the law,” President Bush said of Sarbanes-Oxley, “We need to change the way the law is implemented. . . [c]omplying with certain aspects of the law, such as Section 404, has been costly for businesses and may be discouraging companies from listing on our stock exchanges.”


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