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Nazareth and Beller Open ALI-ABA Sarbanes-Oxley Institute

Commissioner Annette Nazareth, in a keynote address to the American Law Institute/American Bar Association's Sarbanes-Oxley Institute, advised that the SEC's guidance for management on how to conduct a section 404 assessment will not dictate the methods to be followed. The comment period on the concept release closed September 18 and the SEC received over 150 comment letters. On October 11, the SEC announced that it will consider action on the management guidance at a December 13 open meeting.

The SEC is working with the PCAOB to improve Auditing Standard No. 2, according to Nazareth. The SEC will exercise its oversight authority by focusing on whether the PCAOB's inspections are improving audit efficiency by targeting "auditing overkill." Nazareth said she hopes the SEC, through its oversight, will ensure that auditors conduct efficient and cost-effective audits.

In response to views that the Sarbanes-Oxley Act may have gone too far, Nazareth said she disagrees. Listing on a U.S. exchange still provides the lowest cost of capital, she said. Nazareth pointed to recent remarks by PCAOB member Charles Niemeier who said that the greatest costs to companies listing in the U.S. are not compliance-based, but relate to higher underwriting fees. She agreed that the Sarbanes-Oxley Act could benefit from some fine-tuning though, and said that rules should not be allowed to stagnate.

Alan Beller, the former director of the Division of Corporation Finance, presented a retrospective of his years at the SEC, which he said turned out to be the most exciting time to be at the Commission. Beller initially declined then-Chairman Harvey Pitt's request that he join the SEC. After he reconsidered, Beller said it was never the job that he and Pitt had talked about, since Enron filed for bankruptcy shortly before his start date. Enron's collapse was the beginning of a democratization of the securities markets, according to Beller.

After starting work at the Commission in January 2002, Beller said a parade of bad news arrived week after week. He found himself in "an accounting maelstrom." The situation changed from a perception of a few bad apples to the need for a systemic change, he said. The SEC began a series of rulemaking initiatives, the most significant of which, in Beller's view, was the CEO/CFO certification which was adopted before Sarbanes-Oxley.

Beller also pointed to the SEC's order, issued after the WorldCom announcement of its plan to restate its financials, requiring the top companies to certify their previous year's financial statements. WorldCom was the last straw in what seemed like "death by a thousand cuts," Beller explained. He said that program had a "larger than its life" impact on investor confidence, given that fewer than a dozen companies were unable to certify their financial statements.

The relationship between the SEC and the PCAOB in the early days was a work in progress, Beller reported. He also recalled that, when the section 404 rules were proposed along with a proposed requirement to disclose whether audit committees included a financial expert, the latter received many more comments. Section 404 turned out to be the sleeper section of Sarbanes-Oxley, he said.

No one expected it to turn out the way it did. The problem, in Beller's view, was that not many people working in corporate American knew much about internal control frameworks. Since the adoption of the rules, thousands of accountants and corporate personnel have been through a painful training exercise. Beller believes that the first year of implementing section 404 and Auditing Standard No. 2 would have been a struggle even if it had been adopted in the form the PCAOB is moving toward now, because people with knowledge of internal controls were not in place.

The creation of the PCAOB was hugely important, Beller said, since the existing system of self-regulation clearly did not work. He agreed that Sarbanes-Oxley was enacted in haste, but also pointed to the numerous Senate Banking Committee hearings at which every item that found its way into the Act was addressed by high level witnesses. Those hearings forecast everything in the Act, he said.