The End of SOX?

Is SOX legislation on the ropes? If you read the arguments of The Free Enterprise Fund you might think so. The FEF contends the Sarbanes-Oxley Act of 2002 is unconstitutional because of the manner in which the PCAOB has been empowered. Without knowing about the FEF's stand, I would say many public company managers would argue that the cost of the Act exceeds the benefits being reason enough to repeal the Act. On the other hand, citizens watching and reading excerpts from the Enron trial of Ken Lay and Jeff Skilling, may be thinking of due process and "justice". Accountants and Auditors, barreling through another 10K season, may be just wishing to catch their breath and stop second-guessing their professional judgment.

For over three years, public companies and public accounting firms have grappled with the vague passages of the Act and the wide degree of interpretation that have followed. Along the trail, there has been material weaknesses reported, numerous restatements, fraudulent practices rooted out, executive resignations, and shareholder lawsuits. Also along the trail you'll find process remediation, greater internal controls awareness, independent directors, and better transparency.

The scales are heavy on both sides of the equation. My observation is that the Act is slowly attaining the lofty goals of reassuring investor confidence in the U.S capital markets. The balance of cost and benefit will continue to be borne by all sides for a few more years.

A recent study of 404 costs by CRA International commissioned by the Big Four indicated that the cost of 404 would decrease markedly in year two largely due to reduction in control documentation efforts and a gradual flattening of the learning curve. Skepticism about costs continues for many large accelerated filers and may be shared by their respective auditors. I'd chalk this ambivalence up to the top-down, risk-based approach and reliance on others work that were major themes at the SEC roundtable in April of 2005.

While the implementation of section 404 has been clouded by overboard documentation and duplication of testing, I am optimistic that the balance sought by the many affected is taking a foothold. The consequences of not taking adequate time and effort to review ICOFR has a toll and will exact varying forms of discomfort to those constituents that ignore the principles of better corporate governance. If the spirit of the Act is not maintained, it would be akin to regressing to an unstructured, chaotic time where shareholders rely more on faith than good management. Invariably, production would marginalize back office processes and relegate financial reporting as a necessary evil. If the shoe drops for those companies that choose to trust without verifying, who will pay for the lapse of oversight?