Sarbanes-Oxley Remains Imperfect, but TIA-advocated Relief Is on the Way

If the sea of line items and regulatory acronyms surrounding the Sarbanes-Oxley Act flooded your inboxes this past tax season, you're not alone. Though well-intentioned, Sarbanes-Oxley brought with it some unintended consequences, including burdensome compliance costs, confusion on management report filings and an undue burden on small and medium entities (SMEs), many of which are among our members.

And while TIA remains opposed to the act's applicability to small companies, however well-intentioned, the association can point to two regulatory decisions made last week with potential benefits for SMEs. The Securities and Exchange Commission (SEC) and its Public Company Accounting Oversight Board (PCAOB) approved rule changes and set compliance dates that, while imperfect, we think will clarify accounting processes for our members.

First, the new rules allow companies to use their own judgment on which areas are most at risk for fraud – a “risk-based approach” for compiling their management reports. This will save the companies time and money, since they won't have to evaluate every single business aspect for fraud risk.

There has long been a need for regulatory clarity on this issue so SMEs can proceed with their management reports. The SEC's finalization of these guidelines provides this clarity after five years of limbo for our members.

Second, the SEC and PCAOB rules apply a scalable approach, which means management and auditors can consider the size and the complexity of their company when identifying a material weakness. This is beneficial because SMEs have few business lines, simpler reporting systems and less management, and the change frees auditors to focus only on potential risk areas – a big time and money saver. When compliance costs go down, investors are happy.

PCAOB's auditing standard, also approved last week and awaiting full SEC approval, would allow auditors to focus only on the biggest risks, removing limits on their ability to use the work of others or previous years' audits. In fact, the new standard encourages auditors to rely on work already done, yet another time saver.

Sarbanes-Oxley remains imperfect, a heavy-handed attempt to prevent fraud among a few bad actors. But last week's rule changes allow our members some relief. TIA will continue to push for commonsense regulation that protects fairness in the way government treats our members.