A proposal by a subcommittee of the Securities and Exchange Commission to ease auditing checks of smaller businesses' internal controls has met with opposition from a former Federal Reserve chairman and a former SEC chairman. Experts from the InfoWatch analytical center, however, point out that the proposal would help ease the crippling costs that the requirements of the Sarbanes-Oxley Act impose on small businesses.
The proposal by a panel at the Securities and Exchange Commission (SEC) to exempt 80% of public companies from having auditors regularly check their internal controls in line with the Sarbanes-Oxley Act is regarded by Paul Volcker, a former Federal Reserve chairman, and former SEC chairman Arthur Levitt as weakening the present regulations too much.
The subcommittee on small businesses has only suggested exemptions from having auditors certify internal controls for firms with a market value of less than $125 million. However, the requirements for accounting controls linked to internal controls will remain in force. Similar amendments have already been suggested for companies with a market value of $125 million to $700 million. The SEC panel recommended that auditors check the internal controls in place, but refrain from subjecting them to an audit.
However, Paul Volcker and Arthur Levitt believe such an exemption will undermine the ability of the Sarbanes-Oxley Act to combat corporate fraud. They set out their views in a letter dated Feb. 13, 2006 and addressed to SEC Chairman Christopher Cox and William Gradison, acting chairman of the Public Company Accounting Oversight Board (PCAOB).
The letter stated that in passing the Sarbanes-Oxley legislation, Congress adopted a reasonable approach to achieve real reform. If the SEC and PCAOB agree to the proposed exemptions, they will “undercut the effectiveness of congressional legislation through misguided regulatory action," the letter continues.
If the proposals made by the SEC panel are adopted, it will leave only the largest U.S. public companies subject to internal control audits – 20% of the total number of such firms in the U.S. The strongest argument in favor of the change is the financial burden smaller companies face attempting to comply with the Sarbanes-Oxley Act. In 2003 the SEC estimated that complying with internal-control requirements would cost companies an average of $91,000 a year each. A survey last year by Financial Executives International, however, found that companies with less than $100 million in market value expected to pay an average of $824,000 annually to comply.
Volker and Levitt's letter conceded that the current legislation could be improved and endorsed an alternative proposed last month by Levitt. He said the SEC and the accounting oversight board should step up enforcement while easing regulation on companies that have kept a clean record. Levitt also urged the development of software to help small companies document and test controls, which could also help to reduce costs.
“The Sarbanes-Oxley Act really is very expensive for small businesses, forcing them to divert valuable resources away from other important sectors. As a result, the innovation and competitiveness of a company suffers. The law will eventually need to be eased in some way, though how that should be done is a very complex issue. Personally, I think the SEC subcommittee's initiative is most expedient because the proposed changes will reflect positively on the finances of small businesses," believes Denis Zenkin, marketing director at InfoWatch.
Source: The Seattle Times
