Democratic SEC Commissioner Luis Aguilar thinks not:
“While there was much activity this past year, very little has actually been accomplished,” Securities and Exchange Commissioner Luis Aguilar said Feb. 5, expressing doubt that comprehensive financial services reform will become a reality. ...
Aguilar said that while some progress has been made, he remains concerned about how effective such legislation will be. For example, he noted, the 2009 Wall Street Reform and Consumer Protection Act, cleared by the House late last year, contains provisions to rein in predatory mortgage lending, enhance SEC enforcement powers, and boost federal oversight of the derivatives markets, private fund advisers, and credit ratings agencies. However, Aguilar stated, the bill also contains a number of loopholes—including a provision that would exempt half of all U.S. public companies from having an outside audit of their internal controls. He also expressed doubt that ongoing reform efforts in the Senate “will lead to actual legislation. In short, though there has been activity, we do not—yet—have accomplishment.”
The highlighted passage refers to the one clearly desirable aspect of the bill (at least IMHO); namely, the proposed exemption for nonaccelerated filers from the requirement in Sarbanes-Oxley § 404(b) that an issuer's external auditor provide an annual assessment of the issuer's internal controls. As I document in my book The Complete Guide to Sarbanes-Oxley: Understanding How Sarbanes-Oxley Affects Your Business
Sarbanes-Oxley also imposes a much higher regulatory burden on U.S. public corporations than the law’s sponsors ever imagined. According to the Wall Street Journal, for example, publicly traded U.S. corporations routinely report that their audit costs have gone up as much as 30%, or even more, due to the tougher audit and accounting standards imposed by SOX. Indeed, just paying the fees now required to fund the Public Company Accounting Oversight Board (PCAOB) can run as much as $2 million a year for the largest firms.
Professional surveys of U.S. corporations confirm the Journal’s report. Foley & Lardner, a law firm that has conducted a number of empirical analyses of SOX and its impact on American business, found that senior managers of public middle market companies expect costs directly associated with being public to increase by almost 100% as a result of corporate governance compliance and increased disclosure as a result of SOX, new Securities and Exchange Commission (SEC) regulations, and changes to stock exchange listing requirements.
The chief regulatory culprit is SOX § 404, which requires inclusion of internal control disclosures in each public corporation’s annual report. This disclosure statement must include: (1) a written confirmation by which firm management acknowledges its responsibility for establishing and maintaining a system of internal controls and procedures for financial reporting; (2) an assessment, as of the end of the most recent fiscal year, of the effectiveness of the firm’s internal controls; and (3) a written attestation by the firm’s outside auditor confirming the adequacy and accuracy of those controls and procedures.
The SEC initially estimated § 404 compliance would require only 383 staff hours per company per year. According to a Financial Executives International survey of 321 companies, however, firms with greater than $5 billion in revenues spend an average of $4.7 million per year to comply with § 404. The survey also projected expenditures of 35,000 staff hours—almost 100 times the SEC’s estimate. Finally, the survey estimated that firms will spend $1.3 million on external consultants and software and an extra $1.5 million (a jump of 35%) in audit fees.
In fairness, some of these costs were one-time expenses incurred to bring firms’ internal controls up to snuff. Yet, many other SOX compliance costs recur year after year. For example, the internal control process required by § 404 relies heavily on on-going documentation. As a result, firms must constantly ensure that they are creating the requisite paper trail.
It's well established that Section 404 is a major drag on the competitiveness of American corporations and a major deterrent to foreign firms considering raising capital on US stock markets. Exempting the microcaps would still leave them subject to the management assessment requirement under 404(a), while relieving them of a major source of audit expense. It's pretty much the only pro-market thing in the whole bill.
