SEC Drops the Ball on Sarbanes-Oxley

SEC Drops the Ball on Sarbanes-Oxley

Commission Misses a Chance to Advance Meaningful Reform
December 12, 2006

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Richard Morrison, 202.331.2273

 

Washington, D.C., December 13, 2006—The Competitive Enterprise Institute today criticized the Securities and Exchange Commission for failing to provide meaningful relief from the heavy burdens of Sarbanes-Oxley to America’s entrepreneurs. The free-market group also criticized the commission for erecting even more barriers to entrepreneurship through the hedge fund rules it proposed at today’s meeting.

 

“Today, the SEC gave America’s innovators and investors two punches in the face,” says John Berlau, director of CEI’s recently formed Center for Entrepreneurship. “Not only did the agency not make any real changes to the open-ended requirement that firms be audited for broadly defined ‘internal controls’ in the public markets, its rules raising the asset minimums for hedge fund and private equity investors will sharply reduce the pool of capital in the private markets as well.”

 

Berlau argues that the rule changes the SEC touts as easing the burden of Sarbanes-Oxley’s costly section 404 are largely cosmetic and will likely do little to reduce the costs of compliance that rank in the billions of dollars. “Simply proclaiming that audits should be ‘risk-based’ won’t make them so, as long as the other mandates of this auditing standard remain in place,” Berlau said.  “Auditors and companies will still face potential liability for not looking at every last process that could be deemed an ‘internal control,’ even if it has little relevance for shareholders. And the big accounting firms will also still have the big incentive to find every last ‘internal control’ they can audit and bill for.”

 

Berlau says the SEC and the Sarbox-created Public Company Accounting Oversight Board should simply drop the requirement of an annual audit for internal controls. “The statute does not require a full-blown audit,” he says.  “It only calls for, in admittedly vague language, an ‘attestation’ of internal controls by auditors. The agencies should not require that internal controls be examined in the same way a company’s numbers are. Especially since the SEC’s own statistics show there is little relationship between internal control quality and fraud.”

 

Berlau also decries the new restrictions for individuals in qualifying for “accredited investor” status in markets exempt from Sarbanes-Oxley and other cumbersome rules. The SEC voted to raise the asset limit for investors in entities such as hedge fund, private equity, and venture capital from $1 million to $2.5 million, and will not even allow investors to count their homes toward that limit. “This will sharply limit the pool of investors that entrepreneurs can count on to finance their ventures,” Berlau says. “The idea that ‘poor millionaires’ – who ‘only’ have less than $2.5 million – can’t protect themselves is simply absurd. If people are allowed to take out new mortgages that bear risk, they certainly should be allowed to be ‘angel investors’ to new firms. This is paternalism at its worst and another blow to the vibrancy of America’s capital markets.”

 

Berlau says Congress must fix the mess it created with Sarbanes-Oxley and stop the new SEC rules for private markets. “There is bipartisan agreement that Sarbanes-Oxley is too burdensome and our capital markets are suffering. It’s time for both parties to come together on behalf of the entrepreneurs that make this country great.”