Business wins easing of accounting rule

WASHINGTON - Business has won the battle to ease one of the most controversial requirements mandated by the Sarbanes-Oxley corporate-overhaul law: that companies first review their own systems for ensuring accurate financial reports and then have them tested by outside auditors.

The nation's business lobby, which says Sarbanes-Oxley is too burdensome, would like to see even broader changes in the law, which was passed in the wake of the Enron scandal to promote good corporate governance and prevent fraud. Democrats' success in Tuesday's congressional elections makes wholesale changes in the statute less likely.

But securities and accounting regulators are yielding to pressure for a more flexible reading of a provision of the law known as Section 404. Regulators have said they will propose guidance next month to help companies and auditors interpret Section 404 in a way likely to save them time and money.

That's a big victory for business, which has mounted a concerted push to alter the regulation. It could also be good news for U.S. stock exchanges, which in recent years have blamed Sarbanes-Oxley, and particularly Section 404, for discouraging companies from going public in the United States or listing stock here.

At issue is a four-paragraph section of the law that requires publicly traded companies to review and assess the controls they have in place to ensure reliable and accurate financial reporting.

Companies must document such things as who can get access to their financial records and what procedures they have in place for recognizing revenue. The rule is intended to prevent any kind of fraud, manipulation or even error in a company's financial statements.

But companies, both large and small, have complained that the way Section 404 is interpreted is overly broad and requires them to spend many hours and millions of dollars documenting things that have nothing to do with the integrity of their financial statements. According to a study by one industry group, companies on average spent $3.8 million each in fiscal 2005 to comply with the rule.

Some companies, meanwhile, have discovered a booming business in helping others comply with Section 404 and could see their growth slow if the rule is relaxed.

Besides the Big Four accounting companies, which provide the required audits, a variety of software products and consulting services have sprung up since the rule took effect in 2004.

International Business Machines Corp., Oracle Corp., SAP AG and Microsoft Corp. have added software to their lineups to help businesses adhere to the rule. Sarbanes-Oxley work has also increased the revenue of Movaris Inc. and Paisley Consulting.

The Securities and Exchange Commission conceded this year that the provision wasn't working as intended. The SEC says it will unveil its changes next month.It isn't clear how far the SEC might be willing to go in making it easier and less costly for businesses to comply with Section 404. And some observers are skeptical that the problems can be fixed.

"This may be a bell that can't be un-rung," says Joe Grundfest, a former SEC commissioner and co-director of the Rock Center for Corporate Governance at Stanford University. "The audit firms have already incorporated a lot of the inefficient 404 process into their integrated audits, and once audit firms have processes in place, it's very hard to persuade them to back off and ease up on those processes."

Much of the business community continues to support Sarbanes-Oxley's overall goal of improving corporate governance.

But many complain that portions of the law, such as Section 404, and the broader regulatory climate are beginning to put U.S. companies at a competitive disadvantage. Two private-sector commissions have been set up to recommend regulatory changes.