By Carrie Johnson
Washington Post Staff Writer
Saturday, November 11, 2006
Leaders of the Securities and Exchange Commission and the panel that oversees the accounting industry will meet Sunday in an effort to resolve differences over how to overhaul a controversial corporate accountability measure that business groups have targeted as overly expensive.
Tension over a part of the 2002 Sarbanes-Oxley law, which requires companies to review their financial controls and to have auditors pass judgment on them, spilled into public view this week after the release of portions of a letter by SEC Chairman Christopher Cox proposing changes.
The Public Company Accounting Oversight Board, which reviews the work of auditors, met privately for 90 minutes yesterday to consider how to respond to Cox's letter, which urged the board to be flexible and cost-conscious in response to complaints from businesses. Cox and former Federal Reserve Board official Mark W. Olson, who now leads the accounting panel, are to meet this weekend to discuss the issues.
The exact language in Cox's letter has not been made public. Both agencies declined to release it yesterday. But speculation raged after reports suggested that Cox had proposed that small and mid-size companies could avoid reviews of their internal controls altogether or that regulators could render the reviews virtually useless by significantly heightening the standard for what kinds of transactions were important enough for auditors to assess.
Cox, in a telephone interview yesterday, rejected the notion that regulators would gut the internal control standard, which was put in place to help detect fraud and financial errors. Instead, he said, the goal was to retool the provision using "the lessons learned from the past four years," including making sure that "things that don't have to do with financial statements don't have excessive attention" and ensuring that small companies do not bear "disproportionate" cost burdens. Cox declined to be more specific, adding that some of the language mentioned earlier in the week was flatly inaccurate or had already been "overtaken by events."
Several of Cox's ideas spring from a report last year by a committee of small business leaders, which entreated the agency to exempt their companies from internal control reviews. Cox publicly rejected that option. But concern has persisted over the wording of the changes, and what they mean in practice, which can be difficult to grasp for anyone who is not an accountant.
Any formal proposals from the session between Cox and Olson would be unveiled at open meetings next month and subject to public comment, after which they could be modified, regulators from both agencies noted.
After years-long and increasingly intense lobbying, congressional leaders including the presumptive chairman of the House Financial Services Committee, Barney Frank (D-Mass.), and Senate Banking Committee member Charles E. Schumer (D-N.Y.) have called on regulators to ease the burden for industry.
Regulators are racing against the clock. The SEC and the accounting oversight board need a plan in place by March or April at the latest to influence the next round of corporate audits.
The nation's biggest accounting firms have reaped record profits from more-intense audits since Congress passed the law after scandals at Enron Corp. and WorldCom Inc. four years ago. PricewaterhouseCoopers LLP, Deloitte & Touche LLP, KPMG and Ernst & Young renewed a plea this week to insulate themselves from liability for failed audits. Because the firms insure themselves, they say they are at risk of financial disaster if they are deceived by a team of executives engaged in fraud. It is unclear whether the industry, which was tarnished after failing to detect widespread accounting fraud in recent years, has recovered sufficient clout to move ahead with liability reform.
The ongoing and increasingly heated debate over the internal controls provision also renewed tensions between the accounting oversight board, whose members and budget are approved by the SEC, and securities regulators. The board, which was created under the Sarbanes-Oxley law, has struggled to maintain its independence after early skirmishes over leadership. In February, the Free Enterprise Fund sued the board, arguing among other things that it lacked authority under the U.S. Constitution. A federal judge in Washington is considering the case and has requested argument from both sides next month.