Sarbanes-Oxley Exception Denied
Thursday, May 18, 2006
The Securities and Exchange Commission yesterday bucked intense, months-long lobbying by business groups and announced that it will not exempt small companies from a key set of new, post-Enron investor-protection rules.
The SEC said all firms must eventually adhere to the rules, which require companies to document -- and an outside auditor to confirm -- that adequate internal controls are in place to ensure that financial statements filed with the SEC are accurate and paint a realistic picture for investors.
The impact of the rules on small and mid-size public companies has been debated since they were enacted as part of the Sarbanes-Oxley Act of 2002. Many executives and members of Congress had called for small businesses to be exempt from the rules altogether, saying they were too expensive.
Because of the complaints, the agency had extended the deadline for small firms' compliance with the rules as it sifted through comments from executives, specially convened advisory committees and the Government Accountability Office on how the new rules were working.
SEC Chairman Christopher Cox and several fellow commissioners have said publicly in recent weeks that a wholesale exemption of small firms would not happen. But yesterday was the first time the agency said so officially since it began considering changing the rule more than a year ago, in response to industry complaints.
The SEC will not issue proposed final rules for public comment for several months because of their complexity. But Cox said the agency took the unusual step of outlining the general form the rules will take to alert companies that an exemption will not be in the picture. The SEC said it will extend the postponement of the rules for the smallest companies by a few months, but all public companies would have to begin detailed checks of their internal controls by mid-December. The agency also said it will issue detailed guidance to executives at smaller firms on how to comply with the rules so that they do not waste money on unnecessary procedures. Big companies, by contrast, have told the SEC staff that they prefer looser guidance so that executives have more flexibility in implementing the rules depending on their industry. Cox, in an interview, said the guidance will make clear that companies of different sizes can make adjustments in how they apply the rules based on individual circumstances.
He said the SEC will also work with the Public Company Accounting Oversight Board, which the Sarbanes-Oxley Act created to oversee the audit industry, so that the board's rules governing how auditors vouch for a company's internal control system are clear and do not carry unnecessary costs.
"The ultimate objective is to improve the quality of financial statements," Cox said.
Congress passed the Sarbanes-Oxley Act to restore investor confidence after shareholders lost billions of dollars because of accounting fraud at Enron Corp., WorldCom Inc. and a host of other companies.
Last month, a government advisory group created by Cox's predecessor as SEC chairman, William H. Donaldson, and dominated by executives representing small businesses asked the agency to exempt half the country's publicly traded companies from the internal-control rule.
Consumer organizations, several institutional investor groups and at least two former SEC chairmen -- Arthur Levitt, who served under President Bill Clinton, and Richard C. Breeden, who served under President George H.W. Bush -- opposed such an exemption, favoring instead a policy like the one outlined by the SEC yesterday.