As the deadline for its much-anticipated final report to the Securities and Exchange Commission draws near, the SEC Advisory Committee on Smaller Public Companies announced plans to meet by phone on April 12 to discuss the exposure draft of its report.
The draft report includes, among other ideas, a controversial proposal to exempt the smallest public companies from the requirements of the Sarbanes-Oxley Act’s Section 404 and to exempt certain others from Section 404’s external audit requirement.
While the majority of the Committee’s members support the recommendation, some dissenting members, including senior representatives the Big 4 accounting firms, have raised concerns about the exemption proposal. The recommendation has also drawn criticism from some high-profile members of the business community, including two sitting SEC commissioners, former SEC Chairman Arthur Levitt and former Federal Reserve Chairman Paul Volcker.
Members of the public can listen to a Web cast of the April 12 meeting (see details in box at right).
In a move that could potentially affect the outcome of the debate over Section 404 in the United States, Canadian securities regulators recently proposed their own version of Sarbanes-Oxley (see related coverage from last week in box at right). The Canadian provision would apply to all companies, but omits attestations from external auditors as Section 404 requires here. Instead, Canada’s regulation puts more emphasis on required quarterly certifications by management.
Other efforts affecting small companies are afoot. Final guidance for small public companies on how to implement an effective internal control framework is expected next month. The task force of the Committee of Sponsoring Organizations of the Treadway Commission, which issued a draft document in October, is reviewing comments and re-drafting its final document. COSO undertook the effort to scale down its original 1992 guidance to make it more applicable to small companies at the behest of the SEC. In addition, the SEC and the Public Company Accounting Oversight Board have planned a roundtable forum set for May 10 to discuss second-year experiences with the internal controls requirements of the Sarbanes-Oxley Act.
Details, resources, and related coverage can be found in the box at right.
Sen. Paul Sarbanes Says SOX Is Working As Intended
One of the namesake authors of the Sarbanes-Oxley Act says the law “is working as intended” and should not be revised to ease the burden for small companies.
As a result of SOX, auditor independence has been restored and corporate governance practices are changing for the better, said U.S. Sen. Paul Sarbanes in March 23 remarks to the Consumer Federation of America, where he received the group’s Lifetime Consumer Hero Award.
Sarbanes
Responding to critics who say SOX was enacted hastily, Sarbanes noted that the bill had broad bipartisan support and was unanimously approved by the full Senate. “The legislation came in direct response to a crisis whose dimensions it is all too easy, in retrospect, to play down,” he said.
Sarbanes said those who say Congress overreacted in passing Sarbanes-Oxley ought to be reminded of several “crucial points”—chief among them, that the escalating number of corporate scandals in 2001 caused a “grave crisis in investor confidence.”
Calling the collapse of Enron “the canary in the mineshaft,” he said many companies had been using “convoluted and often fraudulent accounting devices to inflate earnings, hide losses and drive up stock prices,” and restatements rose steadily, from 92 in 1997 to 294 in 2001.
“The roots of the problem lay not with the legendary ‘few bad apples’ but rather with systemic and structural defects that required a statutory remedy,” he said.
But “benefits of compliance are emerging,” Sarbanes said. Auditor independence has been restored, with revenues from non-audit services accounting for less than half of audit firm revenues in 2004. The Public Company Accounting Oversight Board provides the “necessary rigorous regulatory framework for the accounting industry,” and the SEC has the resources to hire additional staff and improve its technology infrastructure. “Investors have regained confidence in our capital markets,” he told the group.
Sarbanes said the SEC Smaller Company Advisory Committee’s proposed recommendation to exempt some companies from the requirements of Section 404 “is not the approach we should be taking towards this challenge.” He instead agreed with Kurt Schacht, the member of the Committee’s Section 404 subcommittee who voted against the exemption. “He is correct in suggesting that cost reduction and investor protection do not require an either-or choice but rather a reasonable and responsible balance and accommodation,” Sarbanes said.
“This is the time to move forward, not backward, in a steady and deliberate manner,” Sarbanes said. “Problems can be resolved without undermining the framework.”
American Stock Exchange Latest To Eye Public Offering
The American Stock Exchange plans to be the next member-owned exchange to convert into a for-profit corporation, and will likely move toward an initial public offering within the next two years.
AMEX last week said its Board of Governors approved a plan to begin the conversion of the exchange from a not-for-profit corporation into a for-profit. AMEX seat owners will have the opportunity to vote on the demutualization plan, which would convert their seats into shares.
Wolkoff
Neal Wolkoff, AMEX’s chairman and chief executive officer, said its board of directors has been “carefully examining” the structure of the exchange for months. “The vote to take this course of action will further position the AMEX for growth,” he said in a statement. The demutualization plan would also need approval from the Securities and Exchange Commission.
AMEX’s move comes on the heels of the NYSE’s debut as a publicly traded company earlier this month. Both the NYSE’s demutualization, as well as the Nasdaq’s several years ago, led to major changes in how the two exchanges policed listed companies and enforced governance regulations, essentially splitting off their regulatory arms into standalone entities. AMEX officials have not said how they might handle that problem if they pursue an IPO.
Wolkoff told the media that a public offering was a “likely outcome” of the plan. While no timetable has been set, he said, “Whatever we do would happen before 2008,” according to published reports.
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