SEC Votes To Soften Scope of Audit Law

Board to Revise Reporting Rule In Sarbanes-Oxley

Securities regulators yesterday voted to overhaul a corporate rule covering financial risks, reacting to intense pressure from Congress and years of criticism from industry groups who claim the directive proved too expensive and burdensome.

In a 5 to 0 vote, the Securities and Exchange Commission urged public companies to review only their most critical financial policies for possible fraud and abuse. The agency also cut the amount of work that outside auditors need to perform on clients' financial controls, blamed for rising audit fees over the past three years.

The adjustment to a rule known as Section 404 after its location in the Sarbanes-Oxley corporate accountability law is a substantial victory for business. Regulators initially predicted that the rule would cost an average of $91,000 per company. In the years since, large firms racked up bills in the millions of dollars and battled with auditors about whether they were being charged for busywork.

"This guidance will encourage a healthy use of judgment and common business sense," said the SEC's chief accountant, Conrad Hewitt, who protested the rule's burdens as a board member at several corporations before he joined the agency last year.

Lawmakers representing both parties held multiple oversight hearings and threatened to intervene and rewrite the law if regulators did not act soon.

But, at least for now, smaller companies, which have won several delays and have not yet been forced to adopt the measure, did not get everything on their wish list.

Activists representing small businesses had asked for another deferral but SEC Chairman Christopher Cox said yesterday that "it would not appear that any additional postponement is necessary."

The small-business lobby won support from Sens. John F. Kerry (D-Mass.) and Olympia J. Snowe (R-Maine), who asked regulators to give small companies more time. Under the plan just approved, companies with a market value of less than $75 million will need to begin their reviews of financial controls this year for publication in their 2008 annual reports, and the first public auditor reviews will be published in 2009.

Two Republican SEC members, Paul S. Atkins and Kathleen L. Casey, held out the prospect that they might revisit the issue of a small-business delay in the coming months. Such a move would require the approval of three of the SEC's five commissioners.

In its lengthy meeting yesterday, the agency approved language that would direct company managers to consider problems with financial controls that would result in "a reasonable possibility" of misstatements in corporate filings. That raises the current standard, which addresses problems with a greater than "remote likelihood" of trouble.

Today, the Public Company Accounting Oversight Board is to meet to adopt its revised control guidelines for auditors. SEC officials have worked closely with the board, which oversees the audit industry, to rewrite the rule, occasionally exposing tension between the two groups but also ensuring what they say will be a speedier resolution.

SEC officials said as part of the overhaul that accounting firms would be directed to evaluate only the strengths or weaknesses of clients' financial controls, not the process by which companies developed or reviewed their controls.

Officials at the U.S. Chamber of Commerce called the plan "a major step forward" but said they would track whether the revisions substantially lower costs for business.

Harvard law professor Hal S. Scott, who led an industry-sponsored committee that advocated wide scale revisions to corporate regulation, said the agency did not go far enough. "What they're doing is such a small adjustment," said Scott, who wants the SEC to issue bottom-line guidance on how important or material risks should be handled.

At the same time, consumer groups warn that pruning risk reviews and reducing audit costs could touch off another batch of accounting scandals of the sort that spurred Congress to enact Sarbanes-Oxley in 2002.

The SEC's enforcement unit yesterday announced a $25 million settlement with Bisys Group, which regulators say overstated its financial results by more than $180 million from 2001 to 2003.

Mark K. Schonfeld, director of the SEC's New York office, called the dispute "a case study in internal control failures under earnings pressure."