Sarbanes Oxley – The Resolution or the Cause

Last year, the US Chamber of Commerce created a 15-member commission to assess the effects of litigation and regulation on the US capital market. Tom Donohue, the Chamber’s CEO, is a powerful corporate lobbyist who has become critical of the implementation of Sarbanes Oxley (SarBox), especially section 404 which covers testing of internal controls.

The question remains: Is the litigious US business environment driving away foreign investment in US public companies? Has the SarBox section 404 caused these declines and how could it be changed to build confidence but maintain assurance of the efficiency of internal controls?

Despite the criticism in the report, Christopher Cox of the Securities and Exchange Commission (SEC) has responded by acknowledging SarBox’s difficulties but emphasizing the new changes. The Comprehensive Act of 2007 recommends a limitation of section 404 that only requires internal control auditing every three years. Another proposed change attempts to reduce the costs of these 404 audits for smaller businesses by making them voluntary. There is also a move to rely more on the internal audit function for a lower risk assessment of internal controls.

By changing the rules for implementation, the SEC feels it would appropriately mitigate the costs to firms for their audit AND reduce their exposure to unwarranted securities fraud lawsuits. This is important to maintain the confidence of domestic and foreign investors, but also of public companies that must comply with these strict regulations. It will continue to be a concern for foreign companies looking to enter the US capital market. The SEC’s final response will have a significant impact on the future of US public investment.