Legislative Panel Addresses Sarbanes-Oxley Issues and Solutions

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On Thursday, the Free Enterprise Fund held the first-ever legislative panel to discuss reform of the Sarbanes-Oxley (SOX) Act of 2002. Among the topics discussed by participating legislators were the compliance burdens the Act places on small businesses and the constitutionality of the Public Company Accounting Oversight Board (PCAOB).

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“The Free Enterprise fund is proud to host this important event and grateful to have such a distinguished list of legislative leaders engaged on addressing needed reforms to Sarbanes-Oxley,” Free Enterprise Fund Chairman Mallory Factor said in a prepared statement to the media. “Sarbanes-Oxley is now widely viewed as an inappropriate and categorical response to episodes of corporate malfeasance better addressed under existing laws and legal processes. No one disputes that those who break the law should be held accountable, and they are, as witnessed by the ongoing trials of Enron executives and others, but to date, we have yet to see a single prosecution or conviction under Sarbanes-Oxley. What we have witnessed, however, is the disastrous consequences the law has had on our nation's entrepreneurs, investors, public companies and small businesses who have played by the rules and the aggregate financial implications this had on our capital markets.”

Participants included U.S. Representatives Tom Feeney (R-FL), Jeff Flake (R-AZ), Mark Kirk (R-IL), Jeb Hensarling (R-TX) and Scott Garrett (R-NJ). Others, including New York Attorney General Elliot Spitzer and House Democratic Leader Nancy Pelosi, have also called for SOX reforms in recent months.

The event comes just a week after the Securities and Exchange Commission's (SEC's) Advisory Committee on Smaller Public Companies approved a final set of recommendations reforming Section 404 of SOX. The report defines two distinct groups of small companies, those with market caps of $128 million or less, based on current stock prices and annual revenue of no more than $125 million; and another tier of companies with market capitalization of as much as $787 million and having annual revenues between $10 million and $250 million. The smallest group, often called microcap companies, would be exempt from filing a management report assessing the internal controls over financial reporting, as well as from the requirement to hire an outside auditor to assess those controls. The next group would have to file an annual management report but would be exempt from the outside auditor requirement. Based on data for the SEC's office of economic analysis, these recommendations will affect more than 6,000 companies, the St. Louis Post-Dispatch reports.

“The high burden of regulation and compliance is potentially outsourcing America's lead in the world's capital markets,” Representative Feeney said in a prepared statement about the Free Enterprise Fund event. “More companies are increasingly turning to London or Luxembourg instead of New York. It is time to review the effects of Sarbanes-Oxley in order to maintain the net advantages and reform those provisions that put investors, companies, and the American economy at a disadvantage.”

In the same prepared statement, Representative Kirk agrees, saying, “When a law makes sweeping changes to the way public companies interact with their accounts, investment bankers, and shareholders, we must undertake interim reviews of its impact, and be prepared to initiate changes if the law has unintended consequences. Smaller companies question if the time and money they direct to Sarbanes-Oxley compliance, instead of productive business activities, gives the greatest value to their shareholders. This question deserves an answer.”

The Free Enterprise Fund filed a lawsuit challenging the constitutionality of the PCAOB, saying it violates several fundamental precepts of the constitutional doctrine of separation of powers. The legal challenge is part of a broader Free Enterprise program, the Capital Markets and Financial Integrity Initiative, to engage needed reform of excessive government regulatory power to encourage greater economic competitiveness.

“The Free Enterprise Fund pledges to continue working with legislative leaders to reform this law on behalf of American businesses, employees and investors, to reverse the unnecessary impact Sarbanes-Oxley has had on entrepreneurship, innovation and access to capital formation, and to ensure U.S. capital markets remain open, accessible and unhindered by overbearing, costly regulations,” Factor concluded.

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