Tuesday, May 22, 2007

Congress Will Act if SEC-PCAOB Internal Control Reform Fails

In the next few days, the SEC and the PCAOB will adopt a brand new regulatory regime under the internal control reporting provisions of Section 404 of Sarbanes-Oxley. It is a principles-based, rules-based, scaled, top-down regime designed to allow public companies to comply with Section 404 in a more cost-effective way.

My sense is that, if this fix does not work, Congress will be forced to act to amend Section 404. All three recent white papers on securities regulation reform, Paulson, Bloomberg-Schumer and Chamber of Commerce, have called for the reform of Section 404 since they posit that this mandate is making US markets less competitive.

The Dodd-Shelby amendment to the American Competes Act (S 761) does give the SEC and PCAOB time, but not unlimited time, to reform the internal control reporting mandates.
But an amendment offered by Sen. Jim DeMint (R-SC), although defeated, garnered 35 votes to completely exempt small companies from 404 compliance. Sen. DeMint is not going away; after all he represents a state where incumbent senators simply do not lose. He will be back with a bill if the SEC and PCAOB reforms fail to achieve the desired results, and he will have a tail wind of reform generated by the white papers. Dodd-Shelby did praise 404 for greatly enhancing the quality of financial reporting and increasing investor confidence. But it also praised the SEC and PCAOB for determining that the current auditing standard implementing section 404, AS 2, has imposed unnecessary and unintended cost burdens on small and mid-sized public companies.