THE FIRST legal challenge to the Sarbanes-Oxley Act in the US fails to address the key issues and problems with the law, governance experts have said.
A group of conservative supporters of President George W Bush calling themselves the Free Enterprise Fund (FEF) has filed a lawsuit in the US District Court in Washington, DC listing the Public Company Accounting Oversight Board (PCAOB) as a defendant. The PCAOB was created by SOX to oversee the auditors of public companies.
According to FEF, SOX expands the ability of government to “wield the criminal law as a terrifying regulatory tool”.
The group also claims the PCAOB’s activities violate the US Constitution as its members are appointed by members of the Securities and Exchange Commission. FEF also lays into the Big Four accounting firms, despite the fact that SOX has severely limited their activities. “The PCAOB and the Big Four accounting firms have turned Sarbanes-Oxley into a full employment act for accountants and auditors, in effect rewarding them for their failings in the corporate scandals,” FEF said.
Governance experts said while SOX had been passed quickly, the FEF suit misses the point.
“SOX has been subject to sustained criticism, but less so the PCAOB,” Professor Ian Ramsay, director of the Centre for Corporate Law and Securities Regulation at the University of Melbourne, told Risk Management. “They’ve been endeavouring to some degree to accommodate some of the concerns with the substantial cost impositions with things like section 404. Given that SOX was passed so quickly, there wasn’t any proper cost-benefit analysis of key provisions and a better process would have been more deliberative and would have involved better research. That would have ensured that the process was robust.
“This litigation doesn’t go to the key issues such as section 404. At the end of the day, this [PCAOB] is a board that has been meeting with a broad range of stakeholders, it’s been putting out standards which try and accommodate some of the concerns. This challenge does not address the core issues with SOX.”
US sources added that FEF’s request that smaller companies be exempted from SOX was “extreme”. “I agree that compliance costs have been inordinately high, extremely burdensome and certainly need to be addressed,” said Anne Marchetti, a US-based SOX expert and author of several books on the topic. “However, I don’t believe there should be an exemption for any public company, regardless of size. This, in my opinion, sends the wrong message. If you are a registered public company, you have a responsibility to your shareholders no matter what the size of the organisation.”
The suit does, however, have implications for Australia. Last year, Treasury announced it had begun consultation on aligning the regulation of audit inspections with the US. Treasury’s plan would make Australian companies and auditors currently subject to SOX in the US and domestic regulation in Australia subject to one compliance and inspection process. The Government has already allocated funding for a three-year joint Australian Securities and Investments Commission (ASIC)/Public Company Audit Oversight Board (PCAOB) audit inspection program.
At present, SOX compliers in Australia are subject to dual costs in dealing with inspections by either ASIC or the PCAOB. But in order to obtain harmonisation with the US, Treasury has admitted that regulation will need to be tightened. CLERP9, often described as Australia’s answer to SOX, would not be sufficient to obtain ‘tier 1’ recognition from the US; therefore, “further modifications” to CLERP9 will be needed.
“The Parliamentary Secretary to the Treasurer did release that paper on expanded ASIC power,” said Ramsay. “Should this legal action be successful, there could be an issue. We could see those discussions halted.”
Experts rejected FEF claims that non-American firms are increasingly de-listing from the New York Stock Exchange to avoid compliance costs. “Delisters are a fairly small group,” said Marchetti. “But I had organisations telling me we looked at delisting and it was going to take us too long and be too expensive so we’ve changed our minds.”
Indeed, leading firms in the US have reported benefits stemming from SOX compliance while some Australian firms not required to comply are actually incorporating elements of SOX into their businesses.
Stuart Fagg is the Editor of Lawyers Weekly’s sister publication, Risk Management.