WASHINGTON -- The Securities and Exchange Commission proposed yesterday streamlining corporate accounting rules, addressing a long-standing complaint by businesses that complying with the complex rules can be expensive and time-consuming.
By unanimous vote, commissioners voted to seek comment about making Section 404 of the Sarbanes-Oxley Act more "risk-based," thereby allowing executives to focus their energies on identifying the biggest potential risks to their corporations' books.
The proposed rules would especially benefit smaller companies, which say the costs of abiding by the current ones are especially high.
The accounting rules have posed "the biggest challenge" under the law, SEC Chairman Christopher Cox said at the meeting.
"Without question, it has imposed the greatest cost," Cox said.
The proposed SEC rules would offer management much more flexibility in carrying out audits.
As currently written, the law requires both management and outside auditors to sign off on a company's internal financial controls. Passed after the big accounting scandals of several years ago at WorldCom Inc. and Enron Corp., the law was designed to prevent fraud on corporate books and to hold executives to greater account.
But the guidelines proposed by regulators yesterday would lessen the load on companies by not requiring every financial control to be checked. Under the proposal, auditors would also have to express only one opinion - not two - about a company's internal financial controls.
"This approach will enhance the effectiveness of evaluations and thereby the reliability of financial reporting," said Conrad Hewitt, the SEC's chief accountant. "Investors care most about matters that have a reasonable possibility of impacting the financial statements," Hewitt said.
The move would benefit smaller public companies by allowing them to "scale" their evaluation methods to fit their circumstances.
"It avoids a one-size-fits-all prescription," said Commissioner Paul Atkins, a Republican.
"This approach is intended to liberate companies by allowing them to apply the scalable guidance to their own situations," said Commissioner Annette Nazareth, a Democrat.
Roel Campos, the SEC's other Democratic commissioner, said the proposed guidelines will ease financial burdens on companies but retain "all of the good" of the Sarbanes-Oxley Act. He predicted that foreign investors would flock to U.S. markets "in droves" thanks to the more flexible rules.
While Republicans and Democrats supported the changes, commissioners were bound to disappoint some businesses that had been seeking a wholesale elimination of the audit requirements.
A high-level group of academics and executives recently said in a report that the competitiveness of U.S. markets is at risk because of what some foreign companies view as excessive regulation, including Sarbanes-Oxley.
Regulators and Congress have been inundated with criticism about the internal-controls provision of the law, and both camps have acknowledged the monetary and time costs associated with combing through corporate books. Atkins criticized the audit provisions at the meeting, saying it forces companies to be "at the mercy of their accountants" who must use a "crystal ball" to try to predict flaws on corporate books.
The Public Company Accounting Oversight Board, established under the Sarbanes-Oxley Act, will vote on a similar proposal at its meeting next week.