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December 13, 2009

Sarbanes-Oxley comes under fire in US High Court and Congress

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 July.

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 companies.

The Centre for Audit Quality (CAQ) has written to legislators, urging them to resist efforts to dilute the SOX.

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 companies.

“Reporting under Section 404 provides investors with meaningful information regarding a company’s internal control over financial reporting (ICFR),” the CAQ wrote.

“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 Section 404.”

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