SEC bid to exempt firms from audits draws fire

A U.S. Securities and Exchange Commission panel's proposal to exempt 80 percent of public companies from having auditors certify their internal controls "simply goes too far," former Federal Reserve Chairman Paul Volcker and former SEC Chairman Arthur Levitt told the agency.

In a Feb. 13 letter to the SEC, a group including Volcker and Levitt said such a change would undercut the 2002 Sarbanes-Oxley Act by failing to safeguard against future accounting and company fraud. The letter was sent to SEC Chairman Christopher Cox and William Gradison, acting chairman of the Public Company Accounting Oversight Board (PCAOB).

"In passing the Sarbanes-Oxley legislation, the Congress adopted a reasonable approach to achieve real reform, not just the appearance of reform," the letter said. "It would be unfortunate now if the SEC and PCAOB undercut the effectiveness of congressional legislation through misguided regulatory action."

The law currently requires all U.S. public companies to have their internal controls validated by an auditor. Internal controls refer to the system of checks that companies put in place to safeguard assets, provide reliable financial reports and comply with regulations.

The SEC's Advisory Committee on Smaller Public Companies intends to recommend in April that only the largest 20 percent of U.S. public companies obtain annual approval of their internal controls by auditors, as required by Sarbanes-Oxley.

"People will ask who was responsible for a policy decision resulting in such sweeping exemptions," the letter said.

The letter challenging the SEC's proposal was also signed by John Biggs, former chairman and chief executive officer of TIAA-CREF, the biggest U.S. pension manager; John Bogle, founder and former chairman of mutual-fund company Vanguard Group Inc., and former U.S. Comptroller General Charles Bowsher. The Wall Street Journal reported the letter earlier Tuesday.

The proposed exemption would free companies with less than $700 million in stock-market value from the auditing requirement. Critics including the U.S. Chamber of Commerce say smaller companies cannot afford to comply with the requirement.

The SEC in 2003 estimated that complying with internal- control requirements would cost companies an average of $91,000 a year each.

A survey last March by Financial Executives International, which represents chief financial officers and treasurers, said companies with less than $100 million in market value expected to pay an average of $824,000 annually to comply.

The letter endorsed an alternative proposed last month by Levitt. He said the SEC and the accounting oversight board should step up enforcement while easing regulation on companies that have kept a clean record. Levitt also urged development of software to help small companies document and test controls.

Levitt, 74, is a board member of Bloomberg, parent of Bloomberg News. Volcker was Fed chairman from 1979 to 1987. Most recently, he oversaw the investigation of the United Nations oil-for-food program.

Roel Campos, one of the five SEC commissioners, has also questioned the rationale for a Sarbanes-Oxley exemption.

"Smaller companies often present the greatest risks to investors," Campos said last week in videotaped remarks to an Australian Securities and Investments Commission conference.