Chair of SOX Institute comments on SEC/PCAOB reviewing section 404

Below are some comments from Sanjay Anand, chairman of the Sarbanes-Oxley Institute ( www.soxinstitute.org ), pertaining to the plans of the SEC/PCAOB to review the burdens of SOX in general and section 404 in particular:

It is about time that the SEC and PCAOB took a hard look at the burden of SOX (in particular section 404), and not just for political reasons, but for actually doing an unbiased and effective cost-benefit analysis. While it is impossible that SOX will be repealed (we're too far deep into it not just in the US, but around the world), the expectations going forward do need to be revisited. In particular:

1. For accelerated filers (who are already 404 compliant) ... How can the burden of audits be reduced? That should be a combination of (a) more guidance around the expectations of a top-down risk-based approach, and (b) fewer SOX audits (similar to what some other countries are doing).

2. For non-accelerated filers (whose deadlines are coming up) ... Do they really need full-blown SOX audits? And can we really expect the same level of due diligence from their SOX implementations as we do from those with deeper pockets and larger organizations where segregation of duties and the like are much more likely.

3. Recognition of the fact that companies have spent a lot (in the millions per company, or close to $20 billion collectively over the past 3 years), and admission of the fact that the legislators were off by two orders of magnitude in their estimates and expectation-setting around the cost of compliance.

Although the "word on the street" is that foreign companies are preferring to delist from the US exchanges en masse and re-list on London, Tokyo, HK etc. because of SOX, there is some element of exaggeration in those claims. While SOX is part of the reason, there are other reasons as well (e.g. weak dollar, more capital overseas, risk propensity etc.). In fact, we are seeing a number of Chinese companies come right back to the US to tap into the world's largest capital market (America) despite their initial adverse reaction to SOX.

Point is: SOX has gotten a bad reputation. Much of it was well-deserved, but some of it is clearly exaggerated, and I hope the SEC and PCAOB will take a rational (rather than dramatic or emotional) approach to coming up with a "solution" to the 404 problem. I do expect they will be pragmatic about it, but political pressures can sometimes thwart the best of intentions, and that is my biggest concern. Case in point: SOX. SOX was the result of politicians and legislators trying to solve business problems. Not a bad thing in itself, but can become a disaster and a nightmare if not done in collaboration with those that will be impacted.

So here is the real question: Will the SEC and PCAOB get and use the input of those impacted by SOX, namely the companies, the exchanges and the economy at large, or will they make their decision in a vacuum. I know that they are trying to get as much input as they can. But how do we know that they will use it? And how do we know that they will not be biased in their decision? That to me is the real question.

Like many others out there, I too have my fingers crossed that SOX, albeit not repealed, will take on a shape and a message that will encourage companies to IPO and to list in the US. And it is not just the words and the announcement, but then the follow-through and the implementation that will really make the difference. I think December 13 is just the first day in a new year-long saga. Hopefully, this new saga will have a favorable outcome and a happy ending unlike the saga of 2004 (which is when the first companies had to demonstrate 404 compliance).