Risk & Compliance

Critical Masses

Will Sarbox become a perpetually moving target?
Alix StuartAugust 15, 2007

The movement to scale back recent financial reforms has turned into a veritable book-of-the-month club as one organization after another issues reports that call for major changes to everything from Sarbanes-Oxley to shareholders’ rights. On the heels of last fall’s report by the Committee on Capital Markets Regulation (see “Reform Effort Rebuked,” Topline, February 2007), three more reports or statements recommending Sarbanes-Oxley rollbacks and new limitations on corporate and auditor liability have appeared so far this year, from the U.S. Chamber of Commerce, Financial Executives International, and as a joint effort between New York City mayor Michael Bloomberg and Sen. Charles Schumer (D–N.Y.).

These critics have found a sympathetic ear at the Treasury Department, which has historically avoided such issues in large part because it has no direct control over the agencies that regulate financial markets. But with former Goldman Sachs boss Henry Paulson now at the helm, the Treasury Department seems eager to weigh in; in March it convened a group of heavy hitters, including General Electric CEO Jeff Immelt, Berkshire Hathaway CEO Warren Buffett, and former Securities and Exchange Commission head Arthur Levitt, to discuss whether the Unites States has, as Paulson put it, “struck the right balance between investor protections and market competitiveness.”

Balance is very much on the minds of CFOs, who hope that Sarbox does not remain a perpetually moving target. But some welcome the broad scope of recent reform efforts. “These new reports are helpful,” says James Frates, CFO of drug developer Alkermes Inc., “because they make it clear that it’s not just Sarbanes-Oxley that’s affecting the capital markets.” He expects yet more advocacy efforts to be launched once the SEC issues clarifications on two contentious issues — internal controls and Auditing Standard No. 5 — which it is expected to do next month.

If legislative remedies prove problematic, the courts may provide some relief. In Tellabs v. Makor, the U.S. Supreme Court is expected to determine what sort of threshold investors must meet in advancing securities-fraud claims. And in Stoneridge Investment v. Scientific-Atlanta, the Court will decide whether investors can sue a company’s advisers, including accountants, bankers, and lawyers. “The business community may get a lot of what it wants through judicial decisions, without ever getting a piece of legislation passed,” says Joseph Carcello, director of research at the University of Tennessee’s Corporate Governance Center. That, he says, “is ideal, because it cuts down on the dirty laundry that gets aired.”

A Growing Chorus

November 2006: Committee on Capital Markets Regulation calls for clearer SEC guidance on Sarbox and securities-litigation reforms, including an arbitration option for shareholders, liability caps for auditors, and better indemnification for directors.

January 2007: Bloomberg/Schumer report states that the SEC should give clearer guidance on Sarbox and allow small or foreign firms to opt out of certain aspects. Also advocates accepting U.S. GAAP and IFRS in parallel in advance of convergence and addresses a number of securities-litigation issues.

March 2007: U.S. Chamber of Commerce says companies should eliminate quarterly earnings guidance and the SEC should have more authority over Sarbox so it can make exceptions as needed. Also calls for liability caps for auditors and for the SEC to make civil fines deductible from private-investor litigation demands.

FEI asks FASB to freeze accounting rules until conceptual framework is established; asks Congress to set limits on securities litigation; and creates a committee to explore principles-based accounting.