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Sarbanes-Oxley Cut Back Again

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The 2002 Congress passed the Sarbanes-Oxley Act, which required public companies not just to have internal controls against fraud — something by law they had to do since 1977 — but through its Section 404 also mandated them to report on whether they maintained these controls.

As a board member who often chairs governance sub-committees, I have used Sarbanes-Oxley as the gold standard not just to guide procedures of for-profit but also of not-for-profit organizations. While the latter were not covered under Sarbanes-Oxley, I have advocated that non-profits who followed its guidelines would be at the cutting edge of best practices in good governance. A New York Times article by Floyd Norris “Goodbye to Reforms of 2002” describes how congress already has substantially gutted Sarbanes-Oxley over the years and now plans to further remove most of its teeth.

The bill also provided through the Public Company Accounting Oversight Board for regulation of the accounting industry, which had proven to be greatly flawed in self-regulation. It also reinforced the independence of The Financial Accounting Standards Board that writes US accounting guidelines. Congress, under constant lobbying by representatives of businesses and their bankers with vested interest in not revealing their activities, has been constantly chipping away at these protections almost since they were put in place.

I share Arthur Levitt’s sense of dismay that lawmakers — this time led by Democrats fearful of being seen as anti-business – are attempting to further dismantle the few protections that remain intact. As our nation and the world are just barely beginning to recover from the worst recession since the Great Depression, the American Bankers Association has the audacity to claim that it was not the failures of highly risky, complex, unregulated financial instruments nor the banks not measuring the market values of these toxic securities that caused the cascading collapse of the global economy. Incredulously, they claim it simply was the need to disclose losses that was the cause.

The House Financial Services Committee just approved an amendment to the Investor Protection Act of 2009 — in Norris’ words, “a name George Orwell would appreciate” — that further seriously watered down Sarbanes Oxley. Now one of its sub-committees is trying to take away any remaining force of Section 404 by exempting even more companies from the need for compliance. This is a terrible set-back for the transparency we vitally need to protect not just investors but everyone as all are affected by the consequences of unregulated, largely unknown financial activity and its myriad negative ripple effects.

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  • http://mizbviewsfromthetower.blogspot.com Jeanne Browne

    Thanks for letting us know about this. I must confess that I was unaware this was happening — but I’m not surprised. The only transparency in the private sector that’s really visible is their greed, anger, and audacious attempt to hold the world hostage to their bottom line.

  • Robert Jenkins

    What people, (including the author) fail to appreciate is that small publicly traded companies that cannot afford 404 compliance have an option – delist their securities from an exchange, eliminate costly audits, stop filing quarterly and annual reports with the SEC, and have their stock traded on the “pink sheets”.

    The unintended consequence of forcing very small public companies to comply with a regulation that will not have the desired affect is that investors will have less visibility (no audited financial statements).

    There are numerous public companies that have already delisted their shares due specifically to sox 404. If there is no reprieve, more will do the same.

    I am a director of a small public company – no regulation can stop the top executives from colluding to defraud investors. The best thing to do has already been done by SOX – make the executives sign a statement to the effect that the financials are correct. If they are not, large fines and significant jail time.

  • http://handyfilm.blogspot.com handyguy

    The fact that Barney Frank helped craft this new bill, and that Arthur Levitt is dismayed by it, makes the actual intent and probable effect hard to read.

    Frank is not someone to roll back regulation lightly. He is apparently trying to mollify more moderate/conservative Democrats to help ensure passage of financial reform — which we do need. The changes are designed to help smaller businesses. Larger businesses will still be covered by the old law.

    As with climate change and health care, bills have been crafted with these moderates in mind, and contain elements that liberals would not have otherwise included or voted for.

  • Robert Jenkins

    handyguy – due to the fact that the 404 exemption was not posted as part of the committee’s announcement on their web-site, my guess is that the 404 provision will be dropped before passage.

    This whole issue could be resolved by applying sox 404 depending on where the stock is listed – NYSE, AMEX, and NASDAQ should have to comply, OTCBB should not (and obviously Pink Sheets will not). All OTCBB companies want to be “listed”. This would be an additional cost for those who want this. There are already costs associated with being listed (independent directors, audit committees, etc.).

    Most investors already shy away from OTC issues, so it would just be another caveat emptor for potential investors.