SEC adopts new guidance for Sarbanes-Oxley

WASHINGTON (Reuters) - The U.S. Securities and Exchange Commission approved new guidance on Wednesday to help companies comply with what critics say is a burdensome and costly provision of the Sarbanes-Oxley corporate reform law.

The agency, by a 5-0 vote, encouraged companies to take a more risk-based approach to complying with Section 404 of the legislation.

“Congress never intended that the 404 process should become inflexible, burdensome and wasteful,” SEC Chairman Christopher Cox said at the agency’s open meeting.

Section 404 requires companies to assess their internal controls over financial reporting. It also calls for external auditors to report on management’s assessment and on the controls themselves.

Corporations and business lobbyists have complained that Section 404 was too expensive and the SEC has conceded that, in some cases, overly cautious companies caused the law’s costs to exceed its benefits.

The new guidance allows managers to identify the highest risks to their books as opposed to forcing them to test a long list of controls, as they do now.

The Public Company Accounting Oversight Board is expected to vote on Thursday in favor of revised guidance for auditors on a risk-based approach when assessing a company’s internal controls.

The U.S. Chamber of Commerce applauded the changes.

“This major rewrite is a clear step forward and recognizes how seriously off-track Section 404 implementation has become,” said Michael Ryan, executive director of the chamber’s center for capital markets competitiveness.

But the business federation, which represents more than 3 million businesses and organizations, urged the commission to further delay compliance for smaller businesses until the new guidance has been adopted and tested for a full year by larger companies.


At the open meeting, Cox said the SEC and PCAOB have made excellent progress in addressing small companies’ need to appropriate scale Section 404 requirements and it “would not appear any additional postponement is necessary.”

Small companies with less than $75 million in market capitalization are not scheduled to comply with the management guidance part of Section 404 until the 2007 audit cycle, but Massachusetts Sen. John Kerry, a Democrat, has been pushing the SEC to further delay the implementation date.

Kerry said in reaction to Wednesday’s meeting that he was “disappointed that the SEC chose not to honor the request.”

“These companies need more time to fully digest and execute the changes in the Sarbanes-Oxley rules so they do not struggle to comply,” he said in a statement.

The Sarbanes-Oxley Act included landmark corporate governance and accounting reforms that followed a wave of book-cooking scandals beginning with the 2001 collapse of former energy trader Enron Corp.

The SEC said the new management guidance should not be interpreted as an attempt to roll back the rigorousness of Section 404, or that it would provide less protection for investors.

“The challenge is finding the balance between financial reporting and the efficiency in achieving it,” Cox added.

In other action on Wednesday, the SEC adopted new rules giving it greater authority over credit rating agencies and designed to foster competition in an industry dominated by three firms.