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Sarbox R.I.P.?

There is slowly growing evidence that the seven-year-old law's existence may not be etched in stone.
Sarah Johnson and Alix Stuart, CFO Magazine
December 1, 2009

Could the Sarbanes-Oxley Act of 2002 be repealed? The question is not quite as far-fetched as it once was. For one, the House of Representatives is likely to consider a Sarbox amendment that would permanently exempt small publicly traded companies (those with a market cap of $75 million or less) from the requirement to have an auditor opinion on internal controls. At the same time, the U.S. Supreme Court is slated to hear a case this month alleging that the Public Company Accounting Oversight Board (PCAOB), which was created by Sarbox, is unconstitutional.

While neither potential action necessarily spells the complete dismantling of Sarbox, experts see them as the proverbial camel's nose under the tent. "If one part of Sarbox can be neutralized, the act's opponents will be emboldened to try for more," says Jack Ciesielski, president of RG Associates, an investment research firm.

In Congress, amendment co-authors Scott Garrett (R–N.J.) and John Adler (D–N.J.) not only asked for the exemption but also directed the Securities and Exchange Commission to study how to reduce the cost of compliance for companies with market caps between $75 million and $250 million. The bill was reportedly crafted with encouragement from the White House as a means of helping small businesses, and has already passed the House Financial Services Committee.

Jeff Klausner, CFO of InfoSonics, a publicly traded company with a market cap of about $15 million, says he "did back flips" when he read of the possible reprieve. "It wouldn't change what we're doing except that it would save us a bunch of money on audit fees," says Klausner. He estimates that if InfoSonics needed an auditor's sign-off on its internal controls, the company's audit fees could triple. Despite his enthusiasm, however, Klausner isn't optimistic about a permanent exemption, in part because of the job losses it would likely create in the auditing industry.

"I don't see it going away altogether," agrees Sullivan & Worcester attorney Howard Berkenblit. "Even if this slips through Congress, I wouldn't be surprised if the SEC came up with some alternatives that get small companies to the same place," such as requiring the auditor sign-off for popular capital-raising methods.

Regarding the Supreme Court case, some lawyers suggest that Sarbox could be completely abolished if the PCAOB is found unconstitutional, because there is no "severability" clause in the act to force each part to be treated separately. But not all legal experts see it that way. If the Court decides the PCAOB's current structure is not constitutional, "it would put the impetus on Congress to rewrite that part of the legislation," says Donna Nagy, a professor at Indiana University Maurer School of Law. However, the idea that it could topple the entire act "is wishful thinking," she says, noting that most legislation does not include severability clauses.




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