SOX Rollback Bill Detailed; SEC And Korea; XBRL

On the heels of the Securities and Exchange Commission’s decision that all public companies will be subject to the standards of Section 404 of Sarbanes-Oxley, Congressional lawmakers responded with a legislative bill to make compliance with the internal controls reporting provision voluntary for some companies.

Feeney

U.S. Rep. Tom Feeney, R-Fla., along with 16 co-sponsors, introduced HR 5405—the Competitive and Open Markets Protecting and Enhancing the Treatment of Entrepreneurs Act, known more simply as the COMPETE Act. The bill would amend Sarbanes-Oxley to allow companies to opt out of the requirements of Section 404 if they have a total market capitalization of less than $700 million, total product revenue of less then $125 million, or fewer than 1,500 shareholders. Companies that have been public issuers for less than a year or have never had to file an annual report could also opt out. U.S. Sen. Jim DeMint, R-S.C., introduced a similar Senate bill, S 2824.

Among other goals, the Feeney bill would also allow a system of random audits of a company’s internal controls by external auditors, instead of the annually required audits now; change the threshold for material weaknesses from the current “remote likelihood” standard to a de minimus standard of 5 percent of net profits; and require the SEC and the Public Company Accounting Oversight Board to conduct a study comparing Great Britain’s Turnbull Guidance to the implementation of Section 404 of SOX, and to report the results to the Congress.

The bill has gotten mixed reviews, and it is unclear when Congress might take action to move the bill through the legislative process.

Schacht

“An ‘exemptive’ approach as contemplated by COMPETE says we have solved the Enron problem and that accounting controls have been fixed. We disagree,” says Kurt Schacht, managing director of the CFA Centre for Financial Market Integrity. Schacht was also one of the members of the SEC Advisory Committee on Smaller Public Companies who dissented from the committee’s recommendation to exempt certain companies.

“Our markets are the world gold standard for efficiency, protection and competitiveness … trying to weaken financial reporting regulation down to the lowest common denominator is a mistake in our view and would be a disservice to the millions who invest in small cap firms,” Schacht says. “We agree with the few who have said this is matter for the SEC and PCAOB to solve through better implementation of the internal controls audit process.”

Pollock

In a recent statement lauding the legislation, Alex Pollock, a fellow at American Enterprise Institute for Public Policy Research, wrote, “If accompanied by an explanation to the shareholders of how the company addresses internal controls, this approach is better suited to a market economy and a free society than what Sarbanes-Oxley implementation has become” (see box above, right).

Fans of Section 404 implementation, he continued, “assert that investors will prefer companies which spend the money for 404 audits and so will pay higher prices for their stock. If that is so, it is a great argument for a voluntary standard. If investors actually want the vast internal control documentation that 404 as implemented by regulators and accountants demands, then the companies will voluntarily do it because investors will pay up for it. But if investors conclude that the resources would be better spent elsewhere—on research, new products or customer service, for example—then companies will manage accordingly.”

SEC Chairman Cox Meets Korean Counterpart, Talks Cooperation

Continuing his series of talks with securities regulators from Asia and Europe eager to emulate their American big brothers, SEC Chairman Christopher Cox met recently with Yoon Jeung-Hyun, chairman of the South Korean Financial Supervisory Commission.

Yoon

As was the case in previous meetings with Japanese and Chinese regulators, discussions of how to improve and collaborate on enforcement actions topped the agenda. Cox and Yoon both expressed support for entering into a regular, high-level bilateral dialogue that would enhance the quality of regulatory discussions, foster regulatory transparency, and effectively address key issues for cooperation in cross-border securities investigations.

In a statement, Cox said he and Yoon “acknowledge the importance of promoting cross-border investor protection and converged approaches to our shared goals of protecting investors and fostering market integrity in a global context.

Cox

“We recognize that as cross-border investment between the United States and Korea grows, it becomes more important than ever for regulators to be equipped with the proper tools for timely communication and assistance to combat cross-border fraud and address other common regulatory concerns,” Cox said. He added that he hopes to see terms of reference with the FSC finished by the end of this month.

Ethiopis Tafara, director of the SEC’s Office of International Affairs, noted that the dialogue represents the start of a “new relationship” between securities regulators in Korea and the United States. “As U.S. investors are attracted to Korean investment opportunities and Korean investors look to our markets, cross-border investment, if guarded by strong laws against fraud and converged regulatory standards that provide investors with the information they need, is a win-win situation,” he said.

All XBRL, All The Time: SEC Continues To Push Tagged Data

The SEC’s push on interactive data for corporate filings shows no signs of abating—despite a lack of interest among the business community and persistent questions about the technological underpinnings of the newfangled computer language, known as eXtensible Business Reporting Language.

Last week the agency touted the addition of three more companies to its pilot project for filing corporate reports with interactive data: General Electric, PepsiCo and Banco Itaú Holding Financeira. That brings the total to 20, four months after the Commission promised to give volunteers expedited reviews of their SEC registration statements and annual reports.

Meanwhile, Cox and other SEC representatives were slated to speak this week at the American Enterprise Institute conference on interactive data. Cox was scheduled to deliver the keynote address for the May 30 event.

Over the past year, Compliance Week has written extensively about the Commission's limited success in recruiting companies to participate in XBRL trials, and the reasons why many issuers are wary of the technology (see Related Coverage in box at right).

For those still wondering whether the SEC will mandate that companies file their reports to the SEC using XBRL anytime soon, a recent comment by SEC Chief Information Officer Corey Booth should assure companies that mandated XBRL is still a ways off.

“I believe we have not yet reached an inflection point where there is significant critical mass and knowledge of the XBRL standard,” Booth told attendees at the May 16 XBRL International conference in Madrid, “and so for now I think we can do better by aiming for a market-driven transition to XBRL rather than a regulatory mandate.”

The first in a series of interactive data roundtable discussions will take place at the Commission’s headquarters in Washington, D.C., next month.