The Sarbanes-Oxley Act (SOX) has come
under fire from two directions this month.
On 7 December, the High Court began
considering whether the US Public Company Accounting Oversight
Board (PCAOB), which was created by SOX to oversee the US audit
profession, breaches the constitution.
A small Nevada accounting firm, Beckstead and
Watts, and advocacy group the Free Enterprise Fund, claim the board
lacks presidential control, which is required by the constitution
for executive branch agencies.
The PCAOB’s members are appointed by the
Securities and Exchange Commission (SEC), which is itself an
independent agency. The plaintiffs have already lost the case
before both a district court and an appeals court.
Opinions in the US are mixed as to what the
result will be if the plaintiffs succeed in the High Court. Some
say it could spell the end of the PCAOB and perhaps even bring down
the Sarbanes-Oxley Act, while others suggest it could simply mean
stricter oversight powers for the SEC, such as increased ability to
sack PCAOB members. The case is scheduled to be resolved by
Meanwhile, Congress has been considering
exempting small companies from SOX Section 404(b) requirements.
Section 404(b) requires listed companies to have their internal
controls audited. The smallest listed companies – those with public
floats of less than $75 million – have so far been permitted to
delay complying with 404(b), but the SEC announced in October that
the new deadline for implementation was fiscal years ending on or
after 15 June 2010 and no further delays would be granted.
However, some members of the House of
Representatives have now proposed a permanent waiver for small
The Centre for Audit Quality (CAQ) has written
to legislators, urging them to resist efforts to dilute the
In a letter to Christopher Dodd, the chairman
of the Senate Committee on Banking, Housing and Urban Affairs, and
Richard Shelby, a member of that committee, the CAQ said a waiver
for small companies could mean there would be little independent
scrutiny of financial reporting safeguards at about 6,000 small
“Reporting under Section 404 provides
investors with meaningful information regarding a company’s
internal control over financial reporting (ICFR),” the CAQ
“We believe that the required independent
audit of management’s assessment of the effectiveness of ICFR, as
required by SOX Section 404(b), has been integral to the
achievement of the intended objectives of ICFR reporting under SOX