Dodd-Shelby Amendment Gives SEC and PCAOB Time to Reform Internal Controls Mandates

As the SEC and PCAOB near completion of the new regulatory regime for internal controls reporting, a Dodd-Shelby amendment to the American Competes Act (S 761) would give the SEC and PCAOB more time, but not unlimited time, to reform the internal control reporting mandates under section 404 of the Sarbanes-Oxley Act. Specifically, the amendment, which passed 97-0, expresses the sense of the Senate 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 amendment was introduced by Banking Committee Chair Christopher Dodd (D-Conn) and co-sponsored by Sen. Richard Shelby (R-AL), the committee’s Ranking Member. The Senate passed S 761 by a vote of 88-8.

My take on the situation is that if this reform of section 404 internal controls does not lessen the burden on public companies Congress will act. But for now, they are willing to wait and see if the regulator and standard setter can do the job.

The Senate also supported a Dodd-Shelby motion to table an amendment offered by Sen. Jim DeMint (R-SC). The DeMint amendment would have made section 404 compliance optional for smaller companies with market capitalization of less than $700 million, with revenue of less than $125 million, or with fewer than 1,500 shareholders, thereby exempting over 70% of companies from key parts of Sarbanes-Oxley. This amendment was tabled on a bipartisan vote of 62-35.

By these two votes, the Senate made a strong statement in two respects, according Sen. Dodd. First, that the Senate will continue to protect investors in public companies; and second, that it supports efforts currently underway to ensure that small and mid-size businesses are not unduly burdened by rules intended to protect investors. The Senate rejected an approach that would weaken investor protection and make it more likely for investors to be harmed by the malfeasance that caused the collapse of Enron and WorldCom.

Importantly, the Dodd-Shelby amendment endorsed section 404 for greatly enhancing the quality of corporate governance and financial reporting for public companies and increasing investor confidence. It 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. It also notes that the SEC and PCAOB are nearing completion of a two-year process intended to revise the standard in order to provide more effective regulation. The Senate wants the SEC and PCAOB to complete 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 here, since the statute gives broad discretion.