Lobbies Congress to ease SarbOx burden on small companies’ internal controls
By Stephen Barlas
Business groups and individual companies have viciously attacked the SEC’s reform proposals for Section 404 of Sarbanes-Oxley, with some actively pushing for Congress to ease the regulatory burden.
And Congress is ready to act.
Rep. Greg Meeks (D-N.Y.), teaming up with fellow House Financial Services Committee member Rep. Tom Feeney (R-Fla.), is preparing legislation to make changes to Section 404. In an interview, Mr. Feeney said the bill will be introduced this week.
“Even chairman Frank admits something needs to be done,” Mr. Feeney emphasized. “The question is whether the SEC and PCAOB are prepared to completely resolve the problem, or whether corrective legislation is necessary. I prefer a comprehensive legislative fix.”
Chairman Frank is Rep. Barney Frank (D-Mass.), head of the House Financial Services Committee.
One business group, the Biotechnology Industry Organization, backs the efforts of Messrs. Meeks and Feeney.
“We have been supportive of the intents and goals of congressmen Meeks and Feeney,” said Alan Eisenberg, an executive vice president at BIO, “and look forward to working with them as they get their legislation introduced.”
BIO has been a leading trade association pleading with the SEC to change the Section 404 requirements. Public companies with market capitalizations below $75 million currently enjoy a reprieve, which has been extended a number of times, from filing 404 reports and having the auditor attestations done.
In addition to businesses, consumer groups weighed in loudly against the reform proposals, which could push the Democrat-controlled Congress even further toward stepping in and changing SarbOx. After all, Democrats consider themselves consumer-friendly.
“The guidance is so vague as to be unenforceable,” said Barbara Roper, director of investor protection at the Consumer Federation of America, in her comment letter to the SEC. “As a result, and particularly if the SEC brings that mind-set to its enforcement, managers are likely to be able to claim compliance with the guidelines, and the safe harbor that it provides, for even the shoddiest of internal control assessments.”
A preponderance of the public comments from the business community griped that proposed SarbOx changes—from both the Securities and Exchange Commission and the Public Company Accounting Oversight Board—don’t really clarify the vagueness of the official guidance for small and large companies and come up short on whittling away at Section 404 costs.
Marie K. Lee, counsel and director of finance and tax policy at the American Electronics Association, said the proposals will not be effective “in their current form in significantly reducing the excessive compliance burdens our member companies, and in particular smaller companies, face.”
The association’s office in Washington, D.C., was the venue for a visit by incoming House Speaker Nancy Pelosi (D-Calif.) a few days after the November elections. During that visit, Ms. Pelosi emphasized the Democrats’ determination to fix problems with Section 404 now that they were in power on Capitol Hill.
Asked whether Ms. Pelosi plans to make good on that promise in the wake of the negative comments flooding the SEC and PCAOB, a spokesman replied: “We’re reviewing comments, as is the Financial Services Committee, and we’ve seen a mix of reaction. We want to thoroughly review these comments before we decide possible next steps.”
Last April, an SEC advisory committee recommended the commission develop “scaled” or proportional regulation for companies deemed small-cap or micro-cap, to offer some relief to smaller companies. Instead, the SEC attempted to move ahead and inject its Section 404 guidance with scalability, an effort which, at least in the view of many small business groups, failed miserably.
Thomas M. Sullivan chief counsel of advocacy at the Small Business Administration, said that based on comments from small business executives at an SBA roundtable in January, the SBA believes “the Section 404 requirements will still impose large and disproportionate costs on small public companies.”
The SEC’s attempt to sharpen its definition of “material weakness” fell flat too, particularly in light of the PCAOB definition, which seems miles apart from the SEC’s.
David Chavern, chief operating officer of the U.S. Chamber of Commerce, prefaced his comments, as did many others, by saying both the SEC and PCAOB proposals represent a legitimate and significant attempt to address the widespread concerns of the business community and the difficulties that public companies have faced.
But then he lowered the boom, calling the definition of “material weakness,” which is central to Section 404 analysis, “unnecessarily vague.” He added that the PCAOB has reworded its standard for material weakness from “more than a remote likelihood” in Auditing Standard 2 to “reasonable possibility” in Auditing Standard 5.
Other commentators cited the disconnect between the Interpretative Guidance and AS2.
“We believe that the proposed standards, although improved from the existing PCAOB Audit Standard No. 2, are still more detailed and prescriptive than the proposed guidance,” explained Arnold C. Hanish, executive director and chief accounting officer at Eli Lilly, in his comment letter.
“These differences,” he continued, “will result in external audits that are more conservative than management assessments, which will cause companies to incur unnecessary costs to remain aligned with their external auditors.”
Mr. Chavern of the U.S. Chamber added that because the SEC guidance is “vague as to the specific procedures that companies should follow to establish and evaluate their internal controls,” the proposed safe harbor—companies would be safe from enforcement if they follow the guidance—“does little to reduce the uncertainty that has been inherent in the compliance process to date.”
At least one chief financial officer admitted that the SEC and PCAOB proposals will result in costs that will in fact be lower than what they would have been minus the proposed changes. Question is, would it be a big enough savings?
“We think the implementation of the [guidance] may result in a reduction in issuer compliance costs on a rough order of magnitude of 10% savings in the initial year of adoption and a potential savings of 15% to 20% in subsequent years,” stated Michael E. Keane, vice president and CFO of Computer Sciences Corp.
“Since compliance costs under 404 have been widely reported to approximate $1 million per $1 billion of revenue,” he said, “we estimate this potential savings at 0.02% of public company revenues.”
Business groups and individual companies have viciously attacked the SEC’s reform proposals for Section 404 of Sarbanes-Oxley, with some actively pushing for Congress to ease the regulatory burden.
And Congress is ready to act.
Rep. Greg Meeks (D-N.Y.), teaming up with fellow House Financial Services Committee member Rep. Tom Feeney (R-Fla.), is preparing legislation to make changes to Section 404. In an interview, Mr. Feeney said the bill will be introduced this week.
“Even chairman Frank admits something needs to be done,” Mr. Feeney emphasized. “The question is whether the SEC and PCAOB are prepared to completely resolve the problem, or whether corrective legislation is necessary. I prefer a comprehensive legislative fix.”
Chairman Frank is Rep. Barney Frank (D-Mass.), head of the House Financial Services Committee.
One business group, the Biotechnology Industry Organization, backs the efforts of Messrs. Meeks and Feeney.
“We have been supportive of the intents and goals of congressmen Meeks and Feeney,” said Alan Eisenberg, an executive vice president at BIO, “and look forward to working with them as they get their legislation introduced.”
BIO has been a leading trade association pleading with the SEC to change the Section 404 requirements. Public companies with market capitalizations below $75 million currently enjoy a reprieve, which has been extended a number of times, from filing 404 reports and having the auditor attestations done.
In addition to businesses, consumer groups weighed in loudly against the reform proposals, which could push the Democrat-controlled Congress even further toward stepping in and changing SarbOx. After all, Democrats consider themselves consumer-friendly.
“The guidance is so vague as to be unenforceable,” said Barbara Roper, director of investor protection at the Consumer Federation of America, in her comment letter to the SEC. “As a result, and particularly if the SEC brings that mind-set to its enforcement, managers are likely to be able to claim compliance with the guidelines, and the safe harbor that it provides, for even the shoddiest of internal control assessments.”
A preponderance of the public comments from the business community griped that proposed SarbOx changes—from both the Securities and Exchange Commission and the Public Company Accounting Oversight Board—don’t really clarify the vagueness of the official guidance for small and large companies and come up short on whittling away at Section 404 costs.
Marie K. Lee, counsel and director of finance and tax policy at the American Electronics Association, said the proposals will not be effective “in their current form in significantly reducing the excessive compliance burdens our member companies, and in particular smaller companies, face.”
The association’s office in Washington, D.C., was the venue for a visit by incoming House Speaker Nancy Pelosi (D-Calif.) a few days after the November elections. During that visit, Ms. Pelosi emphasized the Democrats’ determination to fix problems with Section 404 now that they were in power on Capitol Hill.
Asked whether Ms. Pelosi plans to make good on that promise in the wake of the negative comments flooding the SEC and PCAOB, a spokesman replied: “We’re reviewing comments, as is the Financial Services Committee, and we’ve seen a mix of reaction. We want to thoroughly review these comments before we decide possible next steps.”
Last April, an SEC advisory committee recommended the commission develop “scaled” or proportional regulation for companies deemed small-cap or micro-cap, to offer some relief to smaller companies. Instead, the SEC attempted to move ahead and inject its Section 404 guidance with scalability, an effort which, at least in the view of many small business groups, failed miserably.
Thomas M. Sullivan chief counsel of advocacy at the Small Business Administration, said that based on comments from small business executives at an SBA roundtable in January, the SBA believes “the Section 404 requirements will still impose large and disproportionate costs on small public companies.”
The SEC’s attempt to sharpen its definition of “material weakness” fell flat too, particularly in light of the PCAOB definition, which seems miles apart from the SEC’s.
David Chavern, chief operating officer of the U.S. Chamber of Commerce, prefaced his comments, as did many others, by saying both the SEC and PCAOB proposals represent a legitimate and significant attempt to address the widespread concerns of the business community and the difficulties that public companies have faced.
But then he lowered the boom, calling the definition of “material weakness,” which is central to Section 404 analysis, “unnecessarily vague.” He added that the PCAOB has reworded its standard for material weakness from “more than a remote likelihood” in Auditing Standard 2 to “reasonable possibility” in Auditing Standard 5.
Other commentators cited the disconnect between the Interpretative Guidance and AS2.
“We believe that the proposed standards, although improved from the existing PCAOB Audit Standard No. 2, are still more detailed and prescriptive than the proposed guidance,” explained Arnold C. Hanish, executive director and chief accounting officer at Eli Lilly, in his comment letter.
“These differences,” he continued, “will result in external audits that are more conservative than management assessments, which will cause companies to incur unnecessary costs to remain aligned with their external auditors.”
Mr. Chavern of the U.S. Chamber added that because the SEC guidance is “vague as to the specific procedures that companies should follow to establish and evaluate their internal controls,” the proposed safe harbor—companies would be safe from enforcement if they follow the guidance—“does little to reduce the uncertainty that has been inherent in the compliance process to date.”
At least one chief financial officer admitted that the SEC and PCAOB proposals will result in costs that will in fact be lower than what they would have been minus the proposed changes. Question is, would it be a big enough savings?
“We think the implementation of the [guidance] may result in a reduction in issuer compliance costs on a rough order of magnitude of 10% savings in the initial year of adoption and a potential savings of 15% to 20% in subsequent years,” stated Michael E. Keane, vice president and CFO of Computer Sciences Corp.
“Since compliance costs under 404 have been widely reported to approximate $1 million per $1 billion of revenue,” he said, “we estimate this potential savings at 0.02% of public company revenues.”
