SEC Meets To Debate Accounting Provision
Wednesday, April 4, 2007
The Securities and Exchange Commission will meet today to consider easing the most contentious part of the Sarbanes-Oxley Act, which imposed new duties on corporate executives and accountants after a series of fraud-ridden business collapses in 2002.
For five years, industry groups have complained that the law is too complex and burdensome, homing in on a provision that requires companies to assess the strength of their financial controls designed to prevent fraud and mistakes. In recent months, President Bush, Treasury Secretary Henry M. Paulson Jr. and members of Congress have called for an overhaul that would make that provision, known as Section 404, less expensive for small and mid-size businesses.
But striking an appropriate balance between reducing the costs of regulation and preserving the safeguards for investors remains tricky. The SEC's five commissioners are wrestling with how far to scale back the financial-control rule at the same time consumer advocates and a few vocal former agency officials are complaining that regulators are favoring business at the expense of average investors.
Over the past two weeks, officials at the SEC and the Public Company Accounting Oversight Board, a panel that polices the audit industry, have met repeatedly to try to agree on how to rework the rule. SEC Chairman Christopher Cox and his top staff members are pressing the oversight board to allow accountants to rely more on the work of corporate insiders and perhaps perform less independent testing.
Tensions are flaring over the SEC plan, with opponents warning that changing the regulation could give deceitful executives free rein and allow fraud to flourish undetected for years.
The dispute over the scope of Section 404 is shaping up as the most important skirmish so far in a sweeping deregulatory campaign by industry groups that have regained their voices after fraud at Enron and WorldCom temporarily silenced their calls for reform. The outcome could send a potent signal about the way business has regained its clout, analysts said.
SEC Commissioner Roel C. Campos, a Democrat, told an audience last month that "the most famous -- or infamous -- corporate-governance rule in the U.S. is Section 404 of the Sarbanes-Oxley Act. Investors love it. Companies, perhaps not so much."
The dispute also underscores long-standing friction between the SEC and groups that fashion accounting rules. Last year, SEC officials provoked outcry after a memo in which they suggested the accounting board go even further in rolling back the internal-control rule leaked into public view. Eventually, both sides ironed out a compromise, an agreement that appeared to be in jeopardy over the past week during renewed debate on the issue.
Officials from both regulatory agencies stressed yesterday that they would continue to collaborate on the proposal and said they had reached general agreement on the conceptual outlines. But in issues of accounting practices, the devil is often in the details.
Any change to accounting rules can mean millions of dollars in cost savings -- or additional expenses -- to business. The resolution on Section 404 is important for thousands of publicly traded companies and the accounting firms that review their finances. The nation's four largest audit firms are already training their staff on the regulatory changes.
Officials at the accounting oversight board say they want to complete their work and send their final plan to the SEC for approval no later than early June. In a speech last week, Republican SEC Commissioner Paul S. Atkins, who supports significant changes to the rule, said that if the agency is not able to move quickly, it might grant extensions to small and foreign businesses.