Outgoing official calls for patience on Sarbanes-Oxley

The outgoing head of the congressionally created panel that enforces Sarbanes-Oxley audit requirements yesterday defended the landmark law as a success in curbing corporate fraud, but he signaled that possibly significant regulatory tinkering is on the horizon.

The outgoing head of the congressionally created panel that enforces Sarbanes-Oxley audit requirements yesterday defended the landmark law as a success in curbing corporate fraud, but he signaled that possibly significant regulatory tinkering is on the horizon.

William McDonough has led the Public Company Accounting Oversight Board (PCAOB) since its inception in 2002 to help publicly traded companies fall in line with strict new financial-reporting mandates imposed by Congress to heal shaken investor confidence. McDonough’s recent resignation, however, leaves an opening for Sarbanes-Oxley’s vocal corporate critics, who would like the law’s governance standards to be relaxed.

Addressing a group of trade-association officials and lobbyists, McDonough attributed Sarbanes-Oxley’s effectiveness to a higher “fear quotient” among corporate executives of the harsh fallout from accounting fraud. He acknowledged that Section 404, the provision of Sarbanes-Oxley instructing companies to conduct often-complex internal audits, had created a chorus of potentially justified complaints from businesses.

“The first year of 404 did not go very well,” McDonough said, asking for “another year or two of patience on the part of Congress and impatience on the part of the private community, the SEC [Securities and Exchange Commission] and the PCAOB to make Sarbanes-Oxley more effective.”

Sen. Chuck Hagel (R-Neb.), chairman of the Banking Committee’s securities panel, appeared alongside McDonough and tempered his own praise of Sarbanes-Oxley with a strong caveat.

“It’s always in flux, always in need of recalibration, reforming,” Hagel said, a task Congress will leave to the SEC and the PCAOB, a quasi-agency that operates as a nonprofit organization.

Looser financial-management rules for small businesses are high on the list of agency-level reforms. Small businesses have been hit by excessive audit costs that often leave them languishing in noncompliance with the law. Sarbanes-Oxley makes no distinction between multinational corporations and so-called “small-caps,” though the SEC’s advisory committee on smaller public companies is working on changes targeted to small businesses.

“We need to pay some attention to small business ...” Hagel said. “We should not be regulating just to regulate.”

The arrival of former Rep. Chris Cox (R-Calif.), a longtime voice for deregulation, at the helm of the SEC left some Wall Street watchers hopeful that the agency would tamp down Sarbanes-Oxley’s rigor. But Cox, who voted against the investor-community stance on several Sarbanes-Oxley amendments, told Senate Democrats during his confirmation that he would maintain vigorous enforcement standards.

A key test of Cox’s commitment to accounting oversight will be his selection of a replacement for SEC accounting chief Donald Nicolaisen, who resigned last month. Nicolaisen, like McDonough, was installed by former SEC Chairman William Donaldson, who clashed frequently with the corporate world during his two-year tenure.

“There have been a lot of changes at the SEC — staffing changes,” said Alissa Machold Ellsworth, managing director at the Council of Institutional Investors. “There are a lot of eyes watching to see if the SEC keeps up its level of enforcement.”

Karen Kerrigan, president of the Small Business Entrepreneurship Council and one of the Hill’s leading small-business lobbyists, hailed Cox’s decision to put off the imposition of Section 404 on small businesses until 2007. She pointed to future recommendations from the SEC’s small-business advisory committee as crucial to maintaining good faith between companies and the agency.

“We did bring our concerns to Congress on this issue” before lawmakers passed Sarbanes-Oxley, Kerrigan recalled, but she said members had little interest in pausing to reconsider on a bill that “was moving like a speeding train.”

Kerrigan and her allies are pushing the SEC to exempt small businesses permanently from Sarbanes-Oxley reporting requirements, with lobbyists and regulators still hashing out what the threshold for smallness should be.

“Government defines ‘small business’ in so many ways,” depending on the agency at hand, Kerrigan noted.

She also singled out Thomas Sullivan, chief counsel at the Small Business Association’s office of advocacy, as a key presence. Sullivan’s office often independently lobbies other agencies to consider the impact of new regulations on the small-business community.

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