Fight Over SOX Rages Ahead of Supreme Court Ruling

While the Supreme Court could rule on the constitutionality of the Sarbanes-Oxley Act (SOX) before the end of this month, the debate over the Act's merits has continued unabated.

According to the Competitive Enterprise Institute (CEI), which is serving as co-counsel in Free Enterprise Fund v. Public Company Accounting Oversight Board (PCAOB), SOX has had such negative effects as permanently reducing the number of companies going public and negatively affecting job creation and economic growth. "The sheer size of companies going public has increased, in large part because a company needs to be pretty big to afford the accounting costs that have shot up fourfold as a result of SOX, according to a summary of research in the Sarbanes-Oxley Compliance Journal," said the CEI in a recent memo.

Citing a study in Business Week, the CEI also noted that the median market cap for a company doing an Initial Public Offering (IPO) was $52 million in the mid-1990s. "Today, it has shot up $227 million. Google had a $1 billion market cap when it went public of 2004. And Facebook still hasn't gone public, despite having an estimated market cap of nearly $10 billion," they added. "By contrast, in 1981, Home Depot went public with just four stores. Home Depot co-founder Bernie Marcus told Investor's Business Daily that his firm could never have gone public and raised money for growth had SOX been in effect."

"This illustrates the devastating effect of the law in holding back present and future economic growth," said the memo.

In Free Enterprise Fund, the plaintiffs have argued that the PCAOB's existence violates the Constitution's Appointments and Separation of Powers Clauses, which require that important federal officials be appointed by either the president or by Cabinet heads. The PCAOB's members are picked collectively by commissioners at the Securities and Exchange Commission (SEC).

SOX also faces a simultaneous challenge from Congress, as lawmakers continue to hammer out a deal on financial reform that could include an exemption from the Act for small businesses. A group of SOX advocates, namely the Center for Audit Quality (CAQ), the CFA Institute and the Council of Institutional Investors, recently sent a letter to Congress urging them to maintain SOX's integrity and application to the nation's smaller firms. "We ask that you exclude from the final bill an amendment in the House Act that would permanently exempt public companies with less than $75 million in market capitalization from compliance with Section 404(b) of the Sarbanes-Oxley Act of 2002 (SOX)," said the letter. "Section 404(b) requires an independent audit of a public company's assessment of its internal controls over financial reporting (ICFR). We dispute the notion that investors in smaller public companies do not deserve the same financial reporting safeguards as investors of large public companies."

"Like you, our organizations recognize the positive impact small businesses have on the economy and job creation," they added. "However, we cannot support actions, no matter how well intentioned, that threaten investor confidence and the stability of the U.S. capital markets."

Stay tuned to NACM's eNews and Credit Real-Time Blog for any updates.

Jacob Barron, NACM staff writer

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