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Change Sarbanes-Oxley with caution

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January 29, 2007 6:01 am ET

The Sarbanes-Oxley Act was passed in haste in July 2002, less than a month after WorldCom Inc. revealed that it had grossly overstated its earnings during the previous five quarters and less than a year after Enron Corp. filed for bankruptcy protection.

Now there are moves afoot to ease some of the provisions of the act. Last week, even the former scourge of Wall Street, Eliot L. Spitzer, now governor of New York, joined Sen. Charles Schumer (D-N.Y.) and New York Mayor Michael Bloomberg in calling for SOX to be revised.

They and others argue that the legislation has placed such burdens on public companies in the United States that the U.S. capital markets have become uncompetitive. Foreign corporations won’t list on U.S. stock exchanges, because they then have to comply with SOX, which they find too onerous.

“Pass in haste, repent at leisure” would be a good admonition for Congress to keep in mind.

SOX may indeed need tweaking, but any changes must be considered carefully. Let’s not rush and make a mistake in the opposite direction, weakening SOX so much that it fails to do what it was supposed to do — protect investors.

The burdens imposed by SOX include the requirement that companies, in effect, annually audit their internal controls — controls designed to catch fraud and/or malfeasance. Companies also are required to archive every e-mail and telephone call so those records later can be searched, and chief executives and chief financial officers are expected to certify their companies’ financial reports.

Furthermore, SOX requires companies to have fully independent audit committees to oversee the relationships between the companies and their auditors.

It also bans most personal loans from corporations to any executive officer or director, and calls for increased criminal and civil penalties for violations of securities law.

SOX also prompted the creation of the Washington-based Public Company Accounting Oversight Board and bans auditing firms from doing certain types of work for their audit clients.

The initial complaints about SOX concerned the additional auditing costs as auditing firms and companies struggled to meet the tougher requirements, especially the auditing of the internal controls.

Auditing costs have come down, though they still are a concern. The costs of archiving phone calls, instant messages and e-mails also still are of concern.

But for many executives, the greatest concern is the increased personal exposure through having to certify the financial reports — in effect, declaring that they have examined the reports and that the reports are absolutely correct.

Major corporations, especially financial corporations, are so complex that no CEO or CFO — with the best intentions in the world, and the best accounting and control systems available — can know for sure that every significant number in a company’s financial statement is correct.

Yet they may be held accountable by the Securities and Exchange Commission if a breach occurs on their watch, and they may be sued in civil court.

No wonder the CFO of Charlotte, N.C.-based Bank of America Corp. quit last month after only 15 months in the position but 17 years at the bank, commenting on how SOX and the regulatory environment had taken any enjoyment out of the job.

Foreign companies observing the regulatory burdens of the act, and the conjunction of the law and the legal environment in the United States, have decided to raise their financing elsewhere .

This is a serious issue. The United States is uncompetitive in many parts of the economy already and can’t afford to fall behind in the financial arena, too.

But legislators and regulators must not fall so far backward that the doors are opened once again to massive fraud.

Before any changes are made, the law must be studied carefully to see what is working, what has contributed to cleaner markets and what simply is burdensome with little real effect.

Then and only then should changes be made to the law.

The rushed passage of SOX has led to massive unintended consequences. Similar unintended consequences could result from a rushed revision.

And while legislators and regulators are reviewing SOX, they must keep in mind that nothing is more important to the health of the U.S. capital markets than investor trust.

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