The Death of Sarbanes-Oxley (and Internal Control)

An article in the November 30th issue of Business Week described how two attorneys, Michael A. Carvin and Noel J. Francisco, partners in the law firm of Jones Day are challenging the legality of the Sarbanes-Oxley Act of 2002. This case will be heard by the U.S. Supreme Court and is known as Free Enterprise Fund and Beckstead and Watts v. PCAOB and United States of America.

 
A victory for Beckstead could reopen the entire Sarbanes-Oxley Act and further shake the foundations of the Federal Reserve System. There are several far reaching ramifications to this law suit. The contention by the Free Enterprise Fund, a conservative group founded by anti-taxation advocate Stephen Moore is that the PCAOB extends beyond Presidential discipline due to a variety of restrictions on the removal and governance of board members.
 
I found the entire matter interesting and one with lots of issues and challenges for the CPA profession. It was particularly intriguing since I wrote Profitable Sarbanes-Oxley Compliance and taught the subject in CPE presentations. Enron and the many other fraudulent situations underscored the need for a return to sound internal control practices. It also demonstrated the need for better auditing procedures and documentation. We have made a lot of progress to improve internal control and governance.
 
Beckstead’s web site, www.becksteadwatts.com, provides links to the PCAOB inspection report and the clearance letter together with Brad Beckstead’s article detailing his recommendation on providing relief from the internal control requirements of the Sarbanes-Oxley Act based on company size.
 
Based on my work and research, it is my opinion that the matter of internal controls for smaller companies has been addressed by the PCAOB, the SEC, and COSO. There have been extensive hearings held to clear the air and provide direction on implementing cost effective internal control. COSO issued Internal Control over Financial Reporting – Guidance for Smaller Public Companies. Beckwith recommended exempting smaller audit firms from the PCAOB inspection process and returning them to the AICPA Peer Review process. My reaction to this suggestion is that the AICPA has defined and issued SAS nos. 104 – 111, SAS no. 99, and SAS no.112 dealing with internal control in all audits, and not just those of publicly traded companies. The intent of Sarbanes-Oxley was to restore trust in our system, and not just throw everything out the window based on the size of an audit firm and their inability to comply with the standards.
 
In the PCAOB inspection report of Beckstead and Watts, they listed 8 deficiencies which included failure to perform and document sufficient procedures or to test for completeness and accuracy. These are standard accounting assertions which represent the fiber and foundation of our accounting process. Beckstead and Watts responded to the deficiencies and corrected them. In the inspection report, the PCAOB indicated the firm submitted audit reports for 61 clients. If Beckstead couldn’t hire competent accounting personnel to perform the audit work, you have to wonder why they accepted client work that they might not be qualified to service.
 
My concern and reason for this blog post is we have come a long way to have companies improve their internal control processes. Good internal control helps to prevent fraud and also enables companies to better manage their businesses. Size alone is not an excuse for poor controls or for not performing and following sound audit procedures.
 
It will be interesting to follow the judicial proceedings and results of the Supreme Court decision. The current economic environment has produced more fraud and the need for better risk management on the part of both management and CPAs. My feeling when doing research on the PCAOB audit standards was “I thought this is the way we were taught to audit.” The standards were developed by some of the best accountants in the profession and the quality of their work was outstanding. Will the U.S. Supreme Court feel the same way?

 

This blog

Lynn Northrup, CPA, CPIM - Lynn's focus is on building business value for both family-owned businesses and other CPAs. I also specialize in lean accounting, process improvement, internal control, and assessment of audit risk. Other accomplishments include publishing two books, development of self study programs for Bisk Education, and an Adjunct Professorship at Villanova University. My wife Jessica and I live in southwestern Colorado and we look forward to contributing to the AccountingWEB community.

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