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Congress opens the SarbOx box

Financial Week

House legislation could go beyond federal regulators’ proposed relief

By Stephen Barlas

Not content waiting for the Securities and Exchange Commission to revise Sarbanes-Oxley, some Congressmen are taking things into their own hands by preparing to rewrite the law—opening opportunities for change and even lobbyist mischief.

Two House members are readying a version of a Sarbanes-Oxley reform bill as business groups consider whether proposed changes to Section 404 of that law, announced in December, go far enough.

Rep. Gregory Meeks, D-N.Y., and Rep. Tom Feeney, R-Fla., two mid-level members of the House Financial Services Committee, are making substantial changes to the Compete Act, a bill they introduced last year that included provisions to revise Sarbanes-Oxley.

Their bill will prove a test for the new Democratic House leadership, whose two kingpins made promises going into and following the 2006 congressional elections that they would pursue legislative changes to Sarbanes-Oxley.

Jameel Johnson, Mr. Meeks’ chief of staff, said he has been working with groups such as the Institute of Management Accountants, the Financial Services Roundtable and the Biotechnology Industry Organization on the bill’s provisions.

In 2006, BIO helped organize a coalition that sought significant changes to Sarbanes-Oxley. Many of those changes are absent from the interpretive guidance on Section 404 that the Securities Exchange Commission proposed in December and the Public Company Accounting Oversight Board’s proposed revisions to its auditing standard for 404.

The BIO coalition, which includes semiconductor, telecommunications and medical-device trade associations, wants smaller companies to be able to test their financial controls every second or third year, not annually as SarbOx now requires. The Meeks-Feeney bill will include such a provision that applies to companies of all sizes.

Mr. Johnson said the 2007 version of the bill would combine new provisions with some of those included in the bill when it was originally introduced on May 17, 2006. Sen. Jim DeMint, R-S.C., introduced the bill in the Senate at the same time in 2006.

He will reintroduce the bill in 2007, but details haven’t been worked out, according to a spokesman.

“Obviously, their efforts are well placed, and we want to encourage them to move forward,” said Alan Eisenberg, executive vice president of capital formation and business development at BIO.

Political pressure from high-tech companies led Rep. Rahm Emanuel, D-Ill., chair of the House Democratic caucus and ramrod of the Democratic Congressional Campaign Committee, to pledge at an off-the-record meeting of a major business group last September that the Democrats would “relegislate” SarbOx if they gained control of the House, according to someone who attended that meeting.

Then House Speaker Nancy Pelosi, D-Calif., made Mr. Emanuel’s promise public when she unveiled the Democrats’ “Innovation Agenda” at the National Press Club on Nov. 16. That agenda includes a proposal to require specifically tailored guidelines for small public companies to ensure Sarbanes-Oxley requirements are not overly burdensome.

Ms. Pelosi underscored that commitment the next day at a meeting with companies that are members of the American Electronics Association.

A Pelosi spokesman said she wants to see the public comments about the SEC and PCAOB proposals before deciding on a next step. A spokesman for Mr. Emanuel did not return phone calls or e-mails seeking comment.

Over a period of seven days beginning about a month after Ms. Pelosi put forth her party’s agenda, the SEC and PCAOB unveiled their packages of changes to SarbOx rules that were meant to dampen efforts by high-tech groups and the U.S. Chamber of Commerce to force the Democrats’ hands.

The PCAOB then proposed pulling Auditing Standard 2 and substituting a new AS5. PCAOB Chairman Mark Olson presumably echoed Ms. Pelosi by referring to his effort to “scale” audits to the “size and complexity of each company.”

But the Meeks-Feeney bill would go far beyond the SEC and PCAOB changes, which business groups have been busy analyzing.

Mr. Johnson said the 2007 bill would allow companies of all sizes to test their internal controls just once every two or three years after getting a good grade from auditors on their initial accounting review.

“Auditors who come in to test those companies’ financial controls as part of the attestation required by SOX should be able to rely on the analysis done by the federal regulators,” explained Mr. Johnson.

“The outside auditors should not have to test the controls again, as long as the company makes the federal or state review available to the outside auditor.”

This year’s bill may also include some provisions from the original bill, one of which exempted small businesses with a total capitalization under $700 million or product revenue under $125 million from complying with Section 404.

Another provision would allow small companies that hire internal consultants to do the management report and testing to talk with the company’s outside auditors before doing the testing so as to better focus their efforts. That provision will reappear in 2007, said Mr. Johnson. FW