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U.S. Securities Official Urges More Leeway in Corporate Audits

By Andrzej Zwaniecki
Washington File Staff Writer

Washington -- U.S. securities and accounting regulators need to re-examine implementation of part of the U.S. corporate governance law, the Sarbanes-Oxley Act, that is pushing foreign companies to leave the U.S. market, an official of the U.S. securities markets regulator says.

"I believe that we need to take a second look at section 404 [of Sarabanes-Oxley], or more precisely, at the manner in which it has been implemented," Security and Exchange Commission (SEC) Commissioner Paul Atkins said. He emphasized he spoke only for himself, not for his fellow commissioners or the SEC.

Section 404 requires companies and auditors to document thoroughly their procedures, known as internal controls, for assuring the accuracy of companies' financial statements and disclose any weaknesses in those procedures.

Speaking January 19 to the Securities Regulation Institute in San Diego, Atkins said the goals of this section, such as giving shareholders a reliable financial picture of the company and making management accountable for the integrity of financial information, are "laudable." But he said costs involved in the implementation undoubtedly were underestimated.

Atkins cited surveys indicating that actual costs of Section 404 compliance were twenty times higher than those initially estimated.

The costs to companies of meeting the internal-control requirements averaged $4.3 million in 2004, according to Financial Executives International, a professional organization of senior corporate officers.

Atkins cited, however, another survey projecting that these costs will decline by about half in the following years.

Currently, auditors afraid of lawsuits and risk to their reputations tend to be overzealous and stringent in their approach to internal controls, driving the cost of Section 404 compliance up, companies say.

This observation at least partially was confirmed by Atkins who said that, "despite our attempt to emphasize reasonableness [in application of Section 404], people in the trenches are taking an excessive granular approach."

Atkins said the SEC and the Public Company Accounting Oversight Board (PCAOB) must give corporations and auditors more leeway and encourage them to use professional judgment rather than second-guess regulators. PCAOB is a private-sector, not-for-profit company created by the Sarbanes-Oxley Act to oversee auditors.

According to yet another 2005 survey, the majority of public companies need more guidance from regulators on what companies must do and how much they need to disclose to make the compliance process effective but less costly, Atkins said.

Both U.S. and foreign companies operating in the United States have complained that Section 404 implementation is so expensive that it undermines the law's objectives by eroding corporate profits, putting undue burden on executives and damaging relationships between auditors and their clients. The U.S. Chamber of Commerce, the largest U.S. business-lobby group, has been campaigning aggressively for easing of the guidelines and interpretation of Section 404 and other parts of Sarbanes-Oxley.

But Senator Paul Sarbanes defended the law he helped to craft. During an April 2005 discussion hosted by the SEC, he said "fixing weak financial controls has nipped a lot of accounting problems in the bud." And SEC officials say the rule has helped find numerous accounting errors in companies' financial statements.

Atkins also defended a recent SEC proposal that aims to relax deregistration requirements for foreign companies listing their shares on U.S. stock exchanges. (See related article.)

He said he does not expect a mass exodus of foreign companies, as suggested by some critics, following implementation of the proposed change if it is made final even if some companies decide to leave.

Instead, he said "non-U.S. companies will be more willing to register with us if they understand that they are not making an everlasting commitment."

The full text of Atkins' remarks can be viewed on the SEC Web site.