Accounting Observer > Public Blog - BW: SOX Wouldn't Change Plans

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BW: SOX Wouldn't Change Plans

Location: Blogs AAO Weblog (Public)
Posted by: Jack Ciesielski	3/31/2006 7:19 AM
Anyone notice this little story in Business Week Online? (subscription required) An excerpt: "A record 881 small companies filed with the Securities & Exchange Commission in 2005 to register new stock issues and raise $16.3 billion in new capital, according to a study by researchers SME Capital Markets. That's up from 435 in 2003." The story goes on to note that while there was a deferral of SarbOx provisions until 2007, CFOs interviewed for the story said they'd have tapped the public markets anyway, "because they see no choice for raising capital." Makes the whole idea of relaxing Section 404 seem, well, a little fallacious, doesn't it? And the letter that's referenced here raises an interesting point: that the SEC does not have the jurisdiction to make wholesale exemptions to Section 404. It's a letter authored by a group of law professors, and submitted as a response to the SEC's request for comments on the final report of the Advisory Committee for Smaller Public Companies. (Strangely, I couldn't find it as a submission on its own; I found it as an attachment to the AFL-CIO's letter.) An important excerpt: "The Congress, by not imbedding section 404 of Sarbanes-Oxley in the Exchange Act as it did with so many of its other Sarbanes-Oxley provisions, thereby chose to remove section 404 from the SEC's authority to exempt reporting companies from the requirements of section 404. The exclusion of section 404 from the Exchange Act is particularly revealing in view that Exchange Act Section 13(b)(2)(B) mandates that reporting companies "devise and maintain a system of internal accounting controls. . ." If Congress had desired section 404's requirements to be subject to Exchange Act qualification or exemptions that the SEC can adopt pursuant to section 36(a) of the Exchange Act, the natural step for Congress to have taken when enacting section 404 was to cast it as an amendment to Section 13(b)(2). Congress did not do this. The conclusion that Congress intended all reporting issuers to be subject to section 404, and therefore beyond the power of the SEC to adopt exemptions under section 36(a) of the Exchange Act, is further supported by the language of section 404 which requires that the SEC "prescribe rules requiring annual report" of a reporting company include assessment by management of internal controls as well as the independent auditor's attestation of management's assessment." Interesting stuff. The profs further suggest that the SEC can adapt their interpretation of Section 404 as they see fit; they simply can't legally touch its foundation because it's not in their charge.

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