December 10, 2006

Opening the Sarbox

The Securities & Exchange Commission is expected to announce a plan this week (BusinessWeek says it will be Wednesday) to revamp Sarbanes-Oxley, and the PCAOB, which enforces the rules, is also expected to announce a rewrite of its accounting standards.

It's an exercise designed to address businesses' core concern: Compliance simply costs too much. But when the dust settles and final rules are adopted early in 2007, any changes are likely to have a modest impact on Corporate America's bottom line. Their real value, rather, might be peace of mind.

Costs are apparently already decreasing as companies get a firmer grasp on how to do things. The estimate now is that compliance costs are about 0.25% of revenues, with best-of-breed companies at 0.14%.

However, we had an item in our blog, TPMtoday, a few weeks ago, referring to the same rewrite. At that time, the SEC Chairman was pledging to lower costs.

The U.S. Securities and Exchange Commission and the board that regulates accountants will revise the Sarbanes-Oxley corporate governance law to lower compliance costs for public companies based on their market values, the SEC's chairman, Christopher Cox, said Thursday.

"In the next few weeks the United States is going to unveil significant changes to our implementation of a particular part of Sarbanes-Oxley," Cox said from London.

Now it appears the big change, rather than cost reductions, may be legal shields:

Without specific direction from regulators, companies fret that anything intimating even the slightest hint of a shortcut could leave them vulnerable to expensive shareholder litigation. It's that fear, probably as much or more than actual compliance costs, that's driving the call for change.

The recent elections, putting in power a Democratic congress, mean that any changes will come from the SEC and PCAOB, not congress, "because lobbyists fear that reopening the law, especially in the new, Democrat-controlled Congress, risks making it worse."

That means the much-discussed changes to exempt smaller businesses from some provisions of the Act are less likely to happen.