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House Members and Treasury Official Review Sarbanes-Oxley Internal Controls

There likely will be no legislative reform of the Sarbanes-Oxley Act this year, based on remarks at a recent Financial Services Forum roundtable attended by a senior Treasury official and three members of the House Financial Services Committee. According to Rep. Joseph Crowley (D-NY), the 109th Congress is not going act with regard to Sarbanes-Oxley. In his view, the earliest that legislators will take up legislation is in the next Congress or the one after that. Despite the introduction of the Feeney-DeMint COMPETE Act to essentially reform the internal control provisions of section 404 of the Act, there will be no reform until after the impending retirements of Senator Paul Sarbanes (D-MD) and Rep. Michael Oxley (R-OH).

The COMPETE Act would allow smaller public companies to opt out of certain of the more onerous requirements of section 404 and would instruct the SEC and the PCAOB to define the standard of what constitutes a true material weakness. The measure would also allow companies conducting an internal audit to receive technical advice from their external auditors, and require less frequent external audits for all companies complying with section 404.

Randal Quarles, Treasury Under Secretary for Domestic Finance, conceded that the costs of compliance are much higher than what was originally projected and must be reduced in an intelligent and appropriate manner. While concerned that 23 of the 25 largest recent IPOs did not list in the U.S., Quarles said that it is important to understand how much of that is driven by Sarbanes-Oxley and how much by other factors, including technological advances in other markets and U.S. enforcement practices. He also noted that the great bulk of the foreign IPO listings sought capital in the U.S. through 144A tranches. So, although they did not list on an exchange, they still sought capital in the U.S. markets.

Rep. Vito Fossella (R-NY) believes that the Sarbanes-Oxley Act is just one element of a mosaic in how the U.S. competes in the global economy. Other elements that come into play are tax rates, the rule of law, frivolous litigation and the role of regulators. Rep. Tom Feeney (R-FL), however, believes that Sarbanes-Oxley is the biggest reason that capital is fleeing the U.S.

Quarles agreed that some of the financial markets that are competing with New York view the existence of Sarbanes-Oxley as a competitive advantage for them. He believes that there is misunderstanding abroad about the Act versus its associated implementation issues. The solution may be to deal with the two issues separately as opposed to revising the legislation, he said.

According to Crowley, Sarbanes-Oxley has provided more transparency and added to the belief of the American people that their government was willing to intercede and restore confidence in the market. He also noted that the Big Four accounting firms are now more confident and comfortable with the Act. Crowley emphasized that the Act was a response to one of the biggest meltdowns in corporate America. Congressional adjustments would be premature, in his view.

Quarles said that it would be premature to conclude that the U.S. capital markets are suffering because of Sarbanes-Oxley. However, that could change rather quickly, he said, which is why it is very important to strike the right balance between appropriate regulation that insures investor confidence in market integrity and overburdening the capital markets with regulations.

Feeney, while describing himself as the most vocal critic of section 404, also sees significant benefits for companies that have already gone through the experience. He called for Congressional hearings to examine the two years of data on companies that implemented section 404. He also asked for another full year's reprieve for those companies that have not yet been affected until Congress or the regulators can act.

James Hamilton