January 2003

Where the Chips May Fall
Panel Considers Effects of Sarbanes-Oxley

The Sarbanes-Oxley Act of 2002 has helped pave the way to greater investor confidence, but the new legislation, which appears to be fraught with a great deal of uncertainty, can and should only go so far in reforming corporate governance, according to a panel of experts who convened in early December.

Though the act’s ultimate effect on issues, including board membership, foreign registrants and entrepreneurial spirit, among others, remains to be seen, the fate of tax services provided by firms to their audit clients does not seem to be in jeopardy, at least from one panel member’s perspective. “We determined that tax issues are part and parcel a tradition of the audit function,” stated Sarbanes-Oxley co-sponsor Rep. Michael G. Oxley (R-Ohio), who added that the act was not meant to restrict the tax practice.

To help ensure that the act stays its planned course on tax services and all related matters, Oxley as well as the other panel members concluded that the Securities and Exchange Commission will need to remain especially sensitive to Congress’ original intent as the commission continues to draft new rules. By law, the SEC must adopt final rules by Jan. 26.

During a Dec. 9 webcast, Oxley joined Sarah Teslik of the U.S. Council for Institutional Investors, Bill McLucas, a former chief enforcement officer with the SEC, and Dennis Nally, U.S. chairman of PricewaterhouseCoopers, which sponsored the event, to discuss the perceived short- and long-term implications of Sarbanes-Oxley. McLucas noted that much depends on the ability of a historically underfunded and undermanned SEC to “keep pace” and fulfill responsibilities such as establishing the new Public Company Accounting Oversight Board, but that he is concerned that an overzealous crackdown on corporate malfeasance would have negative consequences.

“There is a risk aversion in the marketplace that is not healthy for entrepreneurs who otherwise might be prepared to get back to business,” said McLucas, who feels this development could hinder the economy’s ability to get back on its feet. “I worry that liability concerns have taken center stage so prominently that business decisions and counseling decisions are taking a backseat to judgments about personal risk and personal liability.”

McLucas was not alone in his concerns over what he indicated was too much government intervention. Teslik stated that the ultimate responsibility for a corporation’s governance and structure, particularly with respect to audit committees and boards of directors, should rest with the shareholders, who she believes should possess the ability to remove ineffective board members. Nally added that appropriate ethical behavior is difficult to enforce through legislation and is best achieved by “individuals wanting to do the right thing.”

In addition to stymieing business drive, the current push to preempt future corporate scandals may result in many vacant audit committee and board seats. Though Teslik said she has not witnessed a drop in requests to sit on boards, McLucas observed that the board members recognize the inherent risk involved with a corporation, which, in turn, translates into a reputational and liability risk for them. Nally said there is little doubt that these individuals will be required to invest much more time and commitment; however, he is encouraged by Sarbanes-Oxley’s ability to articulate the relationship and reporting responsibilities between an audit firm and its client.

The reporting responsibility “is now clearly aligned with the audit committee and we think that is good,” Nally said. “At the end of the day, the principal relationship is with the audit committee of the board.”

The panel also discussed the impact Sarbanes-Oxley could have on foreign registrants that may become discouraged from doing business in the U.S. because of new rules and regulations that they perceive as too intrusive into their operations. Though he believes that foreign companies will be compliant with the new laws as long as they want to have access to the U.S. capital markets, Nally cautioned that the enhanced transparency and additional company information in the public marketplace may be deemed a “competitive disadvantage” by others.

Oxley reiterated Nally’s apprehension, noting that he did not think the foreign registrants issue received the “full treatment” it deserved while being debated in Congress.

“I’m concerned that unless we handle this very carefully, we could have some real potential retaliation towards our companies in the European Union,” Oxley said.

As reported by the Washington Post, representatives from global accounting firms and foreign regulators met with the SEC on Dec. 17 to “grant overseas business relief from rules the agency has proposed,” as the rules “would clash with the way business is regulated and conducted overseas.”

Though the panel discussion may have presented more questions than answers, Oxley did help allay concerns that regulations eventually could be imposed on private companies, by stating that he had not heard of any push on the Hill to draft legislation that would pertain to private companies.