Risk & Compliance

Paulson: Regs Went Too Far

In his first speech as Treasury Secretary, Hank Paulson hints at trimming back Sarbox, suggesting that it's time to "achieve the right regulatory b...
Stephen TaubAugust 1, 2006

Treasury secretary Henry Paulson is the latest among a growing number of government and corporate leaders to suggest that the Sarbanes-Oxley Act and other regulatory changes passed in recent years have gone too far.

In a speech Tuesday at Columbia University, the former head of Goldman Sachs, who took over Treasury three weeks ago credits “corrective measures” in the wake of the corporate scandals at Enron and elsewhere for increasing investor confidence and playing a role in the economic recovery.

But Paulson also suggested that perhaps the series of corrective measures were too onerous and should be rolled back somewhat, noting, “Often the pendulum swings too far and we need to go through a period of readjustment.”

He added that “there is no doubt” that certain legal and regulatory actions were critical to restoring confidence. But, he added, “The challenge before us now is how to achieve the right regulatory balance to allow us to be competitive in today’s world while guarding against the recurrence of past abuses.”

While the Treasury Secretary does not have the authority to change any governance-related regulations, his comments could embolden members of Congress and their business supporters who are calling for regulatory review and the rollback of some of the provisions of Sarbox.

Paulson avoided reference to specific regulations, but was most likely alluding to Section 404, the costly internal controls provision that has sparked the biggest backlash from the business community. Less clear is whether his comments reflect a shift in administration policy.

Asked last May about Republican congressional efforts to roll back portions of the controversial provision or exempt smaller companies from its requirements, Paulson’s predecessor, John Snow told CFO.com, “The Administration hasn’t taken a stand.” However, he added, “Our view is that the SEC is in the best position to make those determinations.”

In April, Christopher Cox, chairman of the Securities and Exchange Commission, said small companies should not expect an exemption from the internal-controls provisions of Sarbanes-Oxley. In a speech Cox gave to a Stanford Law School audience, he declared that, “Our emphasis is on making 404 work and implementing it in a cost-effective and investor-protected way, rather than simply waiving it.”

Furthermore, at a conference on financial reporting held at Baruch College in May, then acting SEC chief accountant, Scott Taub, defended Section 404, insisting that, “If you think 404 does nothing for fraud, you’re doing it wrong.”

Both statements seemed to suggest that the SEC was unlikely to make more than minor modifications to the various provisions of Sarbox. One likely change: easing the auditing standards widely blamed for ballooning Sarbox costs. Last month, Cox named Conrad Hewitt as the new SEC chief accountant. In a press statement, Hewitt alluded to working with the Public Company Accounting Oversight Board to eliminate “excessive” auditing costs, possibly referring to reworking the PCAOB’s Auditing Standard No. 2. Hewitt does not begin at the SEC until mid-August, and could not be reached for comment.

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