SOX UNDER ATTACK
As the corporate accounting scandals that led to the creation of the Sarbanes-Oxley Act fade in the public's memory and the difficulties of compliance sink in, the Act is being increasingly challenged on a variety of fronts. Small businesses, which suffer disproportionate implementation costs, have lobbied strongly to be exempted from some of the Act's provisions - most notably the internal control requirements of Section 404.
In May, the SEC officially rejected a recommended regulatory exemption from 404 for smaller public companies, opting instead to issue additional future guidance for companies on a more risk-based and cost-effective approach for compliance. However, all hope isn't lost for these small companies; several lawmakers have proposed a legislative remedy in the form of the Competitive and Open Markets Protecting and Enhancing Treatment of Entrepreneurs (COMPETE) Act. If passed, the COMPETE Act will provide relief for smaller public companies by allowing companies with a market cap under $700 million or product revenue under $125 million to voluntarily opt-out of Section 404 compliance.
Other provisions of the proposed legislation include instructing the SEC and PCAOB to clarify the definitions for a number of currently ambiguous terms and allowing increased interaction between external auditors and internal consultants. (More details on the COMPETE Act and its provisions can be found at http://sessions.house.gov/News/DocumentSingle.aspx?DocumentID=43926.)
Arguably the biggest recent threat to SOX comes in the form of a lawsuit filed by the pro-business conservative lobbying group The Free Enterprise Fund, who has hired Ken Starr, the former special prosecutor in the Monica Lewinsky and Whitewater investigations, as part of the plaintiff's legal team. The suit alleges the unconstitutionality of the section of SOX which establishes the Public Company Accounting Oversight Board (PCAOB), claiming that the PCAOB's structure violates the U.S. Constitution's separation of powers doctrine. Starr told that Associated Press that he believes the case might eventually reach the Supreme Court. If the case is successful and the provision of Sarbanes-Oxley is deemed unconstitutional, then the entire Act could be invalidated. Oral arguments in the case were scheduled to begin June 29 in Federal District Court.