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Act Gives SEC, PCAOB Time to Reform Internal Control Mandates

A provision in the American COMPETES Act (Public Law No. 110-69) inserted by Senate Banking Committee Chair Christopher Dodd and co-sponsored by Richard Shelby, the committee's ranking member, would give the SEC and the Public Company Accounting Oversight Board more time, but not unlimited time, to reform the internal control reporting mandates under Section 404 of the Sarbanes-Oxley Act. Section 8002 of the act expresses the sense of Congress that the SEC and PCAOB should implement the Section 404 mandates in a manner that limits the burdens placed on small and mid-size public companies. The act was passed by Congress and signed into law on August 9, 2007.

Sens. Dodd and Shelby inserted the amendment into the Senate bill, S.761. The House bill, H.R.2272, did not have a similar provision, but adopted the Senate provision. In enacting Section 8002, Sen. Dodd said that Congress made a strong statement in two respects. First, Congress will continue to protect investors in public companies. Second, Congress supports efforts currently underway to ensure that small and mid-size businesses are not unduly burdened by rules intended to protect investors.

The Dodd-Shelby provision endorsed Section 404 for greatly enhancing the quality of corporate governance and financial reporting for public companies and increasing investor confidence. They praised the SEC and PCAOB for determining that Auditing Standard No. 2 had imposed unnecessary and unintended cost burdens on small and mid-sized public companies. Congress is also pleased that the SEC and the PCAOB completed the adoption of the final guidance and standards under Section 404.

Sen. Dodd emphasized that the SEC chair has wide latitude within which to operate, since the statute gives broad discretion. Dodd has a long history of involvement in federal securities regulation, particularly in areas involving financial accounting and the audits of public companies. His guiding principle has been that investor confidence in the accuracy of the outside audit of corporate financial statements is absolutely crucial to the successful functioning of the securities markets. Sen. Dodd was a principal architect of Title I of the Sarbanes-Oxley Act, which created the PCAOB.

The Dodd-Shelby provision is consistent with recent statements by SEC Chair Christopher Cox, that the Sarbanes-Oxley Act did not need to be amended, but that the regulators need to change the way the law is implemented. It is the implementation of the law that has caused the excessive burden, in Sen. Dodd's view, not the law itself.

Sen. Dodd praised the deliberative process of rulemaking and standard-setting conducted by the SEC and the PCAOB in reforming the internal control mandates of Section 404 and commended the SEC for responding very well to the concerns about the Section 404 requirements, particularly those of smaller public companies.

Sen. Shelby observed that the SEC's management guidance and new PCAOB Auditing Standard No. 5 are mutually reinforceable and should significantly improve the implementation of Section 404, making it more efficient and effective for small and medium-sized businesses. Sen. Shelby is satisfied that the agencies recognize that the unnecessary costs imposed by Section 404 are a real problem for both large and small companies.

Sen. Dodd does not believe that the Sarbanes-Oxley Act should be opened up to an amendment at this time. He believes that it would be irresponsible for Congress at this juncture to jump in and greatly reduce the number of companies that would have to comply with Section 404.

The SEC must be allowed to do its job, he said. If the Commission does not do the job, he continued, and the burdens of Section 404 still exist, Sen. Dodd would welcome an opportunity to address it. In his view, the provision sends a message to the SEC and the PCAOB that Congress is watching what they do very carefully. Sen. Shelby was also willing to give the SEC and the PCAOB time to make the significant changes needed to reduce the unacceptable costs and burdens of Section 404 compliance. The problems are very complex, he added, and the regulators should be given a chance to fix them. While Sen. Shelby is willing to give the SEC and PCAOB additional time to fix the problem, he is not willing to give them unlimited time. He said that the banking committee will monitor closely their progress.