GAO: Do not Roll Back SOX Too Far

May 8, 2006 ( - A federal government watchdog group has issued a cautionary warning to securities regulators not to go too far in providing Sarbanes-Oxley relief to small companies.

That caution came in a new report from the Government Accountability Office (GAO), which asserted that the US Securities and Exchange Commission (SEC) needed to make sure that regulators do not lose sight of Sarbanes-Oxley’s original goal in the post Enron scandal era.

It is essential that the overriding purpose of the Sarbanes-Oxley Act – investor protection – is preserved and that SEC assess available guidance to determine if additional supplemental or clarifying guidance for smaller public companies is needed,” wrote GAO researchers in the report. “T he criteria and characteristics used (in help to small companies) should be linked to the investor protection goals of the Sarbanes-Oxley Act and be geared toward limiting the numbers of companies that would be eligible based on those investor protection goals.”

Finally, if SEC commissioners decide to approve small company Sarbanes-Oxley aid – in response to complaints that compliance has proven too onerous and costly – the GAO said regulators need to carefully consider the unique characteristics of smaller public companies and their investors to make sure the objectives of investor protection are met and any relief provided “is targeted and limited.”

The GAO said regulators also need to:

  • assess the sufficiency of internal control guidance for smaller public companies and
  • coordinate with the Public Company Accounting Oversight Board ( PCAOB), a panel created by Sarbanes-Oxley, to ensure consistency of section 404 auditing standards with any additional internal control guidance for public companies

“Public and investor confidence in the fairness of financial reporting is critical to the effective functioning of our capital markets,” the GAO wrote. “Market reactions to financial statement misstatements illustrate the importance of accurate financial reporting, regardless of a company’s size. SEC staff and others have pointed to the increased level of restatements as an indicator that the Sarbanes-Oxley Act – section 404 in particular – has prompted companies to identify and correct weaknesses that led to financial reporting misstatements in prior fiscal years. Over time, having the effective internal control over financial reporting envisioned by the act can reduce some aspects of the higher risk profile of smaller public companies.”

The report is here .