This document argues that smaller public companies should have the option to opt out of complying with Section 404 of the Sarbanes-Oxley Act due to the high costs of compliance. Section 404 requires public companies to establish and maintain internal controls for financial reporting, but compliance has proven much more expensive than initially estimated. The document proposes allowing companies to optionally comply with Section 404, where complying companies would signal strong internal controls and be rewarded by investors, while non-complying companies could avoid high costs. It develops an economic framework to analyze this optional compliance approach and argues the SEC has authority to adopt it.
A detailed perspective of the background, the present functioning and the future possibilities of the merger control regime in India as it unfolds with the passage of time by the architect of merger control in India.
The Companies Act 2014 has been signed into law and is expected to become operative in June 2015. Now that the terms of this new law are settled, we are advising clients to consider the Act’s impact on their future business and transactions.
The Act consolidates and modernises Irish company law and is expected to make it easier for companies to do business in and through Ireland. Matheson has been actively involved in the 14 year progression of this legislation which has been led primarily by the work of the Company Law Review Group (of which a Matheson partner is a member).
The principal changes under the Act relate to the private company limited by shares (the “private company”), which is the most common type of company in Ireland. Going forward, there will be two types of private company, which will replace the existing single form. These will be: (i) a private company limited by shares (“LTD”); and (ii) a designated activity company (“DAC”). These are explained in more detail below. Under the Act, all existing private companies will be required to convert to either an LTD or a DAC.
The document discusses the Sarbanes-Oxley Act of 2002 (SOX), which was passed in response to corporate accounting scandals in the United States. It summarizes some key provisions of SOX, including requiring full financial disclosure from public companies and being applicable to companies listed on U.S. stock exchanges. While India already had its own corporate laws, the document argues some aspects of SOX like increased penalties for white collar crimes could strengthen Indian laws as well. It also notes Clause 49 of Securities and Exchange Board of India attempted to improve corporate governance in a manner similar to SOX.
This document summarizes the Sarbanes-Oxley Act of 2002, which aimed to reform corporate governance and enhance financial disclosures. It discusses the major elements and titles of the act, including establishing the Public Company Accounting Oversight Board, increasing auditor independence, enhancing corporate responsibility and financial disclosures, and increasing penalties for white collar crimes and fraud. Key sections are also summarized, such as sections related to internal controls, off-balance sheet items, assessing internal controls, financial disclosures, criminal penalties, and CEO/CFO certification of financial reports.
This document is the Egypt Code of Corporate Governance from October 2005. It was drafted by Dr. Ziad Bahaa El Din with support from others in the Egyptian business community. The code provides guidelines and standards for corporate governance in Egypt, covering topics like the scope of implementation, roles and responsibilities of the general assembly, board of directors, internal and external auditors, and other aspects of corporate governance. It aims to promote transparency and balance the interests of various corporate stakeholders according to international best practices.
The document discusses several reports and committees related to corporate governance in India. It discusses the key topics, objectives, and recommendations of the Kumar Mangalam Birla Committee report on corporate governance (1999), the Narayan Murthy Committee report on Clause 49 (2002), the Naresh Chandra Committee report on auditing practices (2002), and amendments made to corporate governance regulations in India in 2011. It also outlines the roles and responsibilities of boards of directors, independent directors, audit committees, and remuneration committees in corporate governance.
The document summarizes key aspects of South Africa's new Companies Act, including that it establishes new regulatory institutions, reforms existing ones, updates rules around company names and categories, outlines requirements for company formation and financial reporting, and introduces a new business rescue regime.
A detailed perspective of the background, the present functioning and the future possibilities of the merger control regime in India as it unfolds with the passage of time by the architect of merger control in India.
The Companies Act 2014 has been signed into law and is expected to become operative in June 2015. Now that the terms of this new law are settled, we are advising clients to consider the Act’s impact on their future business and transactions.
The Act consolidates and modernises Irish company law and is expected to make it easier for companies to do business in and through Ireland. Matheson has been actively involved in the 14 year progression of this legislation which has been led primarily by the work of the Company Law Review Group (of which a Matheson partner is a member).
The principal changes under the Act relate to the private company limited by shares (the “private company”), which is the most common type of company in Ireland. Going forward, there will be two types of private company, which will replace the existing single form. These will be: (i) a private company limited by shares (“LTD”); and (ii) a designated activity company (“DAC”). These are explained in more detail below. Under the Act, all existing private companies will be required to convert to either an LTD or a DAC.
The document discusses the Sarbanes-Oxley Act of 2002 (SOX), which was passed in response to corporate accounting scandals in the United States. It summarizes some key provisions of SOX, including requiring full financial disclosure from public companies and being applicable to companies listed on U.S. stock exchanges. While India already had its own corporate laws, the document argues some aspects of SOX like increased penalties for white collar crimes could strengthen Indian laws as well. It also notes Clause 49 of Securities and Exchange Board of India attempted to improve corporate governance in a manner similar to SOX.
This document summarizes the Sarbanes-Oxley Act of 2002, which aimed to reform corporate governance and enhance financial disclosures. It discusses the major elements and titles of the act, including establishing the Public Company Accounting Oversight Board, increasing auditor independence, enhancing corporate responsibility and financial disclosures, and increasing penalties for white collar crimes and fraud. Key sections are also summarized, such as sections related to internal controls, off-balance sheet items, assessing internal controls, financial disclosures, criminal penalties, and CEO/CFO certification of financial reports.
This document is the Egypt Code of Corporate Governance from October 2005. It was drafted by Dr. Ziad Bahaa El Din with support from others in the Egyptian business community. The code provides guidelines and standards for corporate governance in Egypt, covering topics like the scope of implementation, roles and responsibilities of the general assembly, board of directors, internal and external auditors, and other aspects of corporate governance. It aims to promote transparency and balance the interests of various corporate stakeholders according to international best practices.
The document discusses several reports and committees related to corporate governance in India. It discusses the key topics, objectives, and recommendations of the Kumar Mangalam Birla Committee report on corporate governance (1999), the Narayan Murthy Committee report on Clause 49 (2002), the Naresh Chandra Committee report on auditing practices (2002), and amendments made to corporate governance regulations in India in 2011. It also outlines the roles and responsibilities of boards of directors, independent directors, audit committees, and remuneration committees in corporate governance.
The document summarizes key aspects of South Africa's new Companies Act, including that it establishes new regulatory institutions, reforms existing ones, updates rules around company names and categories, outlines requirements for company formation and financial reporting, and introduces a new business rescue regime.
The Sarbanes-Oxley Act of 2002 was enacted in response to major corporate accounting scandals to increase corporate accountability and protect investors. It established new regulatory standards for public company boards, management, and accounting firms regarding issues like auditor independence, corporate governance, and financial disclosure. The Act created the Public Company Accounting Oversight Board to oversee auditing of public companies and established new criminal penalties for fraudulent behavior and retaliation against whistleblowers. Supporters believe it has helped restore confidence in financial markets, while critics argue it has increased regulatory burdens on companies.
The document discusses the Sarbanes-Oxley Act (SOX) and its effects. SOX was passed in 2002 in response to accounting scandals at Enron and other companies. It established new regulations and oversight for public company accounting and governance. SOX aimed to restore investor confidence by increasing transparency and executive accountability. However, it also increased costs and regulatory burdens for companies and reduced initial public offerings in the US.
Legal shorts 31.07.15 including AIFMD annex iv reporting AIFMD and UCITS V re...Cummings
This document provides a summary of recent legal and regulatory developments in the UK financial services industry from the law firm Cummings Law. It summarizes updates from the FCA on AIFMD reporting requirements, ESMA guidelines on remuneration policies under AIFMD and UCITS V, and new FCA forms for the senior managers regime. It also briefly outlines reports from other organizations on topics like OTC derivatives reforms, the FX working group code of conduct, and proposed changes to UK limited partnerships for private equity investments.
Trade, Antitrust and Other Regulatory Matters in BRICSIlya Nikiforov
Investments in BRICS: Business Perspectives and Legal Frameworks. IBA: Investments in BRICS. February 2013. Session: Trade, Antitrust and Other Regulatory Matters in BRICS. Ilya Nikiforov
The document discusses business law reforms in Singapore. It provides an overview of the Accounting and Corporate Regulatory Authority (ACRA) and its role in administering various Acts related to business registration and regulation. Key reforms under review include regulating online businesses, annual business registration renewal, improving directors' duties and shareholder engagement, reforming financial rules, and establishing a new small company regime. The future plans are to draft new Business Registration and Companies Bills to update the laws and remove non-core provisions from the Companies Act.
This document outlines corporate governance requirements for banks and bank controlling companies in South Africa. It discusses key principles of corporate governance from international and local standards. The Banks Act and regulations establish specific governance duties for bank directors and executive officers, including fiduciary duties to act in good faith and avoid conflicts of interest. The BA 020 declaration requires extensive personal and professional information from prospective and current directors and officers to assess their fitness and propriety.
The Securities and Exchange Commission has been entrusted with a significant corporate compliance regulatory function, which has been expanded by seminal legislation in the recent past such as the Sarbanes-Oxley (“SOX”) and Dodd-Frank Acts. This webinar discusses board fiduciary duties and the tension between state corporate law standards and federal law. Board composition, independence, structure and processes (including best practices in regard to committees) are analyzed. Specifically, director independence is discussed as is audit committees and related requirements, regulations and exemptions. NASDAQ and the NYSE also have similar requirements for director independence and those are also discussed. The webinar also covers disclosure matters related to SOX compliance, including timing and content of an issuer's periodic disclosures. Both the legal requirements and best practices related to disclosure procedures and internal controls under SOX are examined. Means of controlling the costs of SOX, especially for smaller public companies, are also discussed, including trends in the industry related to high regulatory compliance costs. Finally, the applicability and best practices for privately held companies and SOX are considered.
To listen to this webinar on-demand, go to: https://www.financialpoise.com/financial-poise-webinars/securities-law-compliance-2020/
AMR Corporation operates American Airlines and its subsidiaries, which together operate an extensive domestic and international air travel network. In recent years, AMR has faced financial difficulties, filing for Chapter 11 bankruptcy in 2011. As part of its restructuring, American Airlines and US Airways agreed to a merger in 2013 that would create the world's largest airline. AMR's financial reports indicate liquidity issues, with current liabilities exceeding current assets. Solvency ratios also reflect high debt levels, with most assets financed through debt. Profitability has been low and negative in recent years, as reflected in negative returns on assets and no dividends declared.
Ey 2018-uk-corporate-governance-code-and-new-legislationKevin McCaffrey
The document summarizes key changes and requirements in the 2018 UK Corporate Governance Code and new related legislation. Some of the main points covered include:
- The 2018 Code places more emphasis on stakeholder engagement, workforce engagement, corporate culture and purpose.
- It introduces requirements around board diversity, succession planning, independence and overboarding.
- The role of the nomination committee is expanded around succession planning and reporting.
- New legislation requires companies to report on how they consider stakeholder interests, and include a CEO pay ratio and workforce engagement statement.
- Areas like chair tenure, independence criteria, and audit committee responsibilities saw some changes following consultation feedback.
- Listed companies will need to comply with
Raising the bar_on_CG - world bank report 2013BFSICM
This study reviews the different approaches used by eight stock exchanges around the world to build indices incorporating corporate governance criteria. It finds that corporate governance indices (CGIs) can enhance legal frameworks by establishing objective benchmarks and provide companies opportunities to differentiate themselves. However, methodologies, disclosure, and monitoring processes need further development. CGIs address weaknesses in governance, but criteria and eligibility vary between indices based on listing tiers with mandatory rules or rating thresholds. Evaluation and transparency are important for an index's credibility. Overall, CGIs positively impact markets by promoting higher governance standards.
Misuse of Corporate Vehicles (Mr Richard Gordon , Financial Markets Integrity...Corporate Registers Forum
This document discusses recommendations for corporate registries to help combat beneficial ownership opacity. It analyzes data from 40 countries on what information registries collect, how they verify it, and accessibility. Key findings are that most registries are passive and do not verify beneficial ownership. The document recommends that registries maintain basic entity information, transition to more active roles in anti-money laundering, invest in technology, and allow universal searches. Collecting and verifying beneficial ownership would require significant changes but could help investigators if
The document provides an overview of corporate governance standards in Japan. It discusses how Japan historically had a bank-centered system dominated by large conglomerates called zaibatsu. While reforms have been implemented, issues remain like a lack of independent directors and transparency. The Olympus scandal is presented as an example of these ongoing problems. Overall, the document analyzes both historical context and current issues, as well as proposals to strengthen rules regarding boards and improve standards going forward in Japan.
The Sarbanes-Oxley Act (SOX) established new regulations regarding corporate governance and financial disclosures. It contains eleven titles addressing issues like corporate responsibility, enhanced financial disclosures, and criminal penalties. Key sections require CEOs and CFOs to personally certify financial reports, mandate timely disclosure of material financial events, establish rules around off-balance sheet transactions, and require management to assess internal controls over financial reporting. The act also makes it a crime to alter or destroy audit documents to obstruct an investigation.
Secretarial audit - Urgent need for simplification of Form MR-3 (Part one) - ...D Murali ☆
Secretarial audit - Urgent need for simplification of Form MR-3 (Part one) - Dr S. Chandrasekaran - Article published in Business Advisor, dated February 25, 2015 http://www.magzter.com/IN/Shrinikethan/Business-Advisor/Business/
The Sarbanes-Oxley Act of 2002 was enacted in response to major corporate and accounting scandals to protect investors. Section 404 of the Act requires companies to assess the effectiveness of their internal controls over financial reporting and disclose any material weaknesses found. It is one of the most costly aspects of the Act for companies to implement. Section 404 requires management to produce an annual internal control report evaluating the company's controls and the auditor to attest to management's assessment.
The document discusses the Sarbanes-Oxley Act (SOX) passed in the United States in response to major corporate accounting scandals. It summarizes key provisions of SOX including those relating to internal controls, financial disclosures, auditor independence and oversight. It then compares SOX to existing regulations and standards in India established by organizations like the Institute of Chartered Accountants of India. While Indian laws already addressed many issues covered by SOX, the document argues that India could benefit from stricter penalties for white collar crimes and more real-time financial disclosures as mandated by SOX.
NASDAQ Listing Requirements- The NASDAQ Stock Market currently has three tiers of listed companies: (1) The NASDAQ Global Select Market, (2) The NASDAQ Global Market and (3) The NASDAQ Capital Market. Each tier has increasingly higher listing standards, with the NASDAQ Global Select Market having the highest initial listing standards and the NASDAQ Capital Markets being the entry-level tier for most micro- and small-cap issuers. Keeping in line with the focus of my blogs and practice, this
blog is focused on the NASDAQ Capital Market tier...
Trans African Energy Pty - Establishment of an Independent Sytem OperatorStephen Labson
There has been ongoing interest in setting up an Independent System Operator (ISO) in South Africa with draft legislation being developed from time to time. However, there does not seem to us to be a consensus view on the scope or role of the ISO or consequential restructuring of the ESI that it might entail.
Nevertheless, the importance of the matter us such that it warrants discussion at a number of levels. The part of that discussion we would like to engage in pertains to the practical aspects of establishing such an entity.. In this regard, we wish to highlight that we have not aimed to undertake a normative study – that is – we do not mean to recommend which model should be applied. Our aim is simply to highlight key issues that would need to be addressed should South Africa decide to establish an ISO.
An eBook full of great advice for Operations Business managers with many contributirs but organized and coordinated by Terry O'Hanlon from Reliabilityweb
Ολοκληρώσαμε μια σημαντική άποψη που αφορά ρουχα για παχουλες
Στα άρθρα μας μπορείτε να διαβάζετε ρούχα plus size
Η Jessica Vander Leahy δημιούργησε τη σειρά #ProjectWomanKIND.
Ο απόλυτος οδηγός ενημε΄ρωσης πάνω σε ρούχα μεγάλα μεγέθη.
Σε μια πολυσύνθετη κοινωνία οι νέες προδιαγραφές που βάζει η αγορά μας δίνουν σε μεγάλο βαθμό την ευχέρεια να εκτιμήσουμε τόσο τα προβλήματα όσο και τις λύσεις.
Είναι μοντέλο για μεγάλα μεγέθη και όπως είπαμε φέρνει ένα θέμα που απασχολεί πολύ. Ρούχα σε μεγάλα μεγέθη για όλες τις παχουλές γυναίκες.
ρούχα για παχουλές η έκταση και η μέθοδος διαμόρφωσης των στελεχών μας λύνουν τα χέρια ώστε να τονίσουμε χωρίς αμφιβολία ένα δυναμικό σύστημα αντιμετώπισης των νέων μεγάλων απαιτήσεων του καιρού μας.
Πληροφορηθείτε από το πρωτότυπο δημοσίευμα αναφορικά με 'Γυναίκες με καμπύλες'
πατήστε εδώ http://www.blueshark.gr/gynaikes-me-kampyles/
Η πρώτη σειρά βίντεο είναι η Leahy και με τα μοντέλα Olivia Langdon, Sophie Sheppard, Stefania Ferrario και Margaret Macpherson, και συζητούν για προσωπικές εμπειρίες σε σχέση με την εικόνα του σώματος τους, και πως τελικά ξεπέρασαν τις ανασφάλειες που είχανε.
Και με τον τρόπο αυτό ρούχα plus size μας κάνουν να ενισχύσουμε το πόσο αναντικατάστατα είναι τα προϊόντα μας.
Εδώ έχετε τη δυνατότητα να ενημερώνεστε ρούχα μεγάλα μεγέθη
Επιπλέον σημειώνουμε ότι αν θέλετε να μάθετε με λεπτομέρειες σχετικά με ρούχα για παχουλές πατήστε εδώ http://www.blueshark.gr
The document discusses achieving sustained growth through establishing a go-to-market fit (GTMF) operating system. It emphasizes building depth in leadership and operational teams and taking a "franchise-model" mindset. The GTMF system should be optimized for speed and deliver a whole product solution. Key components include recruiting top talent, refining marketing, sales, product development and customer success based on metrics as the company doubles in size, and establishing a winning culture.
The Sarbanes-Oxley Act of 2002 was enacted in response to major corporate accounting scandals to increase corporate accountability and protect investors. It established new regulatory standards for public company boards, management, and accounting firms regarding issues like auditor independence, corporate governance, and financial disclosure. The Act created the Public Company Accounting Oversight Board to oversee auditing of public companies and established new criminal penalties for fraudulent behavior and retaliation against whistleblowers. Supporters believe it has helped restore confidence in financial markets, while critics argue it has increased regulatory burdens on companies.
The document discusses the Sarbanes-Oxley Act (SOX) and its effects. SOX was passed in 2002 in response to accounting scandals at Enron and other companies. It established new regulations and oversight for public company accounting and governance. SOX aimed to restore investor confidence by increasing transparency and executive accountability. However, it also increased costs and regulatory burdens for companies and reduced initial public offerings in the US.
Legal shorts 31.07.15 including AIFMD annex iv reporting AIFMD and UCITS V re...Cummings
This document provides a summary of recent legal and regulatory developments in the UK financial services industry from the law firm Cummings Law. It summarizes updates from the FCA on AIFMD reporting requirements, ESMA guidelines on remuneration policies under AIFMD and UCITS V, and new FCA forms for the senior managers regime. It also briefly outlines reports from other organizations on topics like OTC derivatives reforms, the FX working group code of conduct, and proposed changes to UK limited partnerships for private equity investments.
Trade, Antitrust and Other Regulatory Matters in BRICSIlya Nikiforov
Investments in BRICS: Business Perspectives and Legal Frameworks. IBA: Investments in BRICS. February 2013. Session: Trade, Antitrust and Other Regulatory Matters in BRICS. Ilya Nikiforov
The document discusses business law reforms in Singapore. It provides an overview of the Accounting and Corporate Regulatory Authority (ACRA) and its role in administering various Acts related to business registration and regulation. Key reforms under review include regulating online businesses, annual business registration renewal, improving directors' duties and shareholder engagement, reforming financial rules, and establishing a new small company regime. The future plans are to draft new Business Registration and Companies Bills to update the laws and remove non-core provisions from the Companies Act.
This document outlines corporate governance requirements for banks and bank controlling companies in South Africa. It discusses key principles of corporate governance from international and local standards. The Banks Act and regulations establish specific governance duties for bank directors and executive officers, including fiduciary duties to act in good faith and avoid conflicts of interest. The BA 020 declaration requires extensive personal and professional information from prospective and current directors and officers to assess their fitness and propriety.
The Securities and Exchange Commission has been entrusted with a significant corporate compliance regulatory function, which has been expanded by seminal legislation in the recent past such as the Sarbanes-Oxley (“SOX”) and Dodd-Frank Acts. This webinar discusses board fiduciary duties and the tension between state corporate law standards and federal law. Board composition, independence, structure and processes (including best practices in regard to committees) are analyzed. Specifically, director independence is discussed as is audit committees and related requirements, regulations and exemptions. NASDAQ and the NYSE also have similar requirements for director independence and those are also discussed. The webinar also covers disclosure matters related to SOX compliance, including timing and content of an issuer's periodic disclosures. Both the legal requirements and best practices related to disclosure procedures and internal controls under SOX are examined. Means of controlling the costs of SOX, especially for smaller public companies, are also discussed, including trends in the industry related to high regulatory compliance costs. Finally, the applicability and best practices for privately held companies and SOX are considered.
To listen to this webinar on-demand, go to: https://www.financialpoise.com/financial-poise-webinars/securities-law-compliance-2020/
AMR Corporation operates American Airlines and its subsidiaries, which together operate an extensive domestic and international air travel network. In recent years, AMR has faced financial difficulties, filing for Chapter 11 bankruptcy in 2011. As part of its restructuring, American Airlines and US Airways agreed to a merger in 2013 that would create the world's largest airline. AMR's financial reports indicate liquidity issues, with current liabilities exceeding current assets. Solvency ratios also reflect high debt levels, with most assets financed through debt. Profitability has been low and negative in recent years, as reflected in negative returns on assets and no dividends declared.
Ey 2018-uk-corporate-governance-code-and-new-legislationKevin McCaffrey
The document summarizes key changes and requirements in the 2018 UK Corporate Governance Code and new related legislation. Some of the main points covered include:
- The 2018 Code places more emphasis on stakeholder engagement, workforce engagement, corporate culture and purpose.
- It introduces requirements around board diversity, succession planning, independence and overboarding.
- The role of the nomination committee is expanded around succession planning and reporting.
- New legislation requires companies to report on how they consider stakeholder interests, and include a CEO pay ratio and workforce engagement statement.
- Areas like chair tenure, independence criteria, and audit committee responsibilities saw some changes following consultation feedback.
- Listed companies will need to comply with
Raising the bar_on_CG - world bank report 2013BFSICM
This study reviews the different approaches used by eight stock exchanges around the world to build indices incorporating corporate governance criteria. It finds that corporate governance indices (CGIs) can enhance legal frameworks by establishing objective benchmarks and provide companies opportunities to differentiate themselves. However, methodologies, disclosure, and monitoring processes need further development. CGIs address weaknesses in governance, but criteria and eligibility vary between indices based on listing tiers with mandatory rules or rating thresholds. Evaluation and transparency are important for an index's credibility. Overall, CGIs positively impact markets by promoting higher governance standards.
Misuse of Corporate Vehicles (Mr Richard Gordon , Financial Markets Integrity...Corporate Registers Forum
This document discusses recommendations for corporate registries to help combat beneficial ownership opacity. It analyzes data from 40 countries on what information registries collect, how they verify it, and accessibility. Key findings are that most registries are passive and do not verify beneficial ownership. The document recommends that registries maintain basic entity information, transition to more active roles in anti-money laundering, invest in technology, and allow universal searches. Collecting and verifying beneficial ownership would require significant changes but could help investigators if
The document provides an overview of corporate governance standards in Japan. It discusses how Japan historically had a bank-centered system dominated by large conglomerates called zaibatsu. While reforms have been implemented, issues remain like a lack of independent directors and transparency. The Olympus scandal is presented as an example of these ongoing problems. Overall, the document analyzes both historical context and current issues, as well as proposals to strengthen rules regarding boards and improve standards going forward in Japan.
The Sarbanes-Oxley Act (SOX) established new regulations regarding corporate governance and financial disclosures. It contains eleven titles addressing issues like corporate responsibility, enhanced financial disclosures, and criminal penalties. Key sections require CEOs and CFOs to personally certify financial reports, mandate timely disclosure of material financial events, establish rules around off-balance sheet transactions, and require management to assess internal controls over financial reporting. The act also makes it a crime to alter or destroy audit documents to obstruct an investigation.
Secretarial audit - Urgent need for simplification of Form MR-3 (Part one) - ...D Murali ☆
Secretarial audit - Urgent need for simplification of Form MR-3 (Part one) - Dr S. Chandrasekaran - Article published in Business Advisor, dated February 25, 2015 http://www.magzter.com/IN/Shrinikethan/Business-Advisor/Business/
The Sarbanes-Oxley Act of 2002 was enacted in response to major corporate and accounting scandals to protect investors. Section 404 of the Act requires companies to assess the effectiveness of their internal controls over financial reporting and disclose any material weaknesses found. It is one of the most costly aspects of the Act for companies to implement. Section 404 requires management to produce an annual internal control report evaluating the company's controls and the auditor to attest to management's assessment.
The document discusses the Sarbanes-Oxley Act (SOX) passed in the United States in response to major corporate accounting scandals. It summarizes key provisions of SOX including those relating to internal controls, financial disclosures, auditor independence and oversight. It then compares SOX to existing regulations and standards in India established by organizations like the Institute of Chartered Accountants of India. While Indian laws already addressed many issues covered by SOX, the document argues that India could benefit from stricter penalties for white collar crimes and more real-time financial disclosures as mandated by SOX.
NASDAQ Listing Requirements- The NASDAQ Stock Market currently has three tiers of listed companies: (1) The NASDAQ Global Select Market, (2) The NASDAQ Global Market and (3) The NASDAQ Capital Market. Each tier has increasingly higher listing standards, with the NASDAQ Global Select Market having the highest initial listing standards and the NASDAQ Capital Markets being the entry-level tier for most micro- and small-cap issuers. Keeping in line with the focus of my blogs and practice, this
blog is focused on the NASDAQ Capital Market tier...
Trans African Energy Pty - Establishment of an Independent Sytem OperatorStephen Labson
There has been ongoing interest in setting up an Independent System Operator (ISO) in South Africa with draft legislation being developed from time to time. However, there does not seem to us to be a consensus view on the scope or role of the ISO or consequential restructuring of the ESI that it might entail.
Nevertheless, the importance of the matter us such that it warrants discussion at a number of levels. The part of that discussion we would like to engage in pertains to the practical aspects of establishing such an entity.. In this regard, we wish to highlight that we have not aimed to undertake a normative study – that is – we do not mean to recommend which model should be applied. Our aim is simply to highlight key issues that would need to be addressed should South Africa decide to establish an ISO.
An eBook full of great advice for Operations Business managers with many contributirs but organized and coordinated by Terry O'Hanlon from Reliabilityweb
Ολοκληρώσαμε μια σημαντική άποψη που αφορά ρουχα για παχουλες
Στα άρθρα μας μπορείτε να διαβάζετε ρούχα plus size
Η Jessica Vander Leahy δημιούργησε τη σειρά #ProjectWomanKIND.
Ο απόλυτος οδηγός ενημε΄ρωσης πάνω σε ρούχα μεγάλα μεγέθη.
Σε μια πολυσύνθετη κοινωνία οι νέες προδιαγραφές που βάζει η αγορά μας δίνουν σε μεγάλο βαθμό την ευχέρεια να εκτιμήσουμε τόσο τα προβλήματα όσο και τις λύσεις.
Είναι μοντέλο για μεγάλα μεγέθη και όπως είπαμε φέρνει ένα θέμα που απασχολεί πολύ. Ρούχα σε μεγάλα μεγέθη για όλες τις παχουλές γυναίκες.
ρούχα για παχουλές η έκταση και η μέθοδος διαμόρφωσης των στελεχών μας λύνουν τα χέρια ώστε να τονίσουμε χωρίς αμφιβολία ένα δυναμικό σύστημα αντιμετώπισης των νέων μεγάλων απαιτήσεων του καιρού μας.
Πληροφορηθείτε από το πρωτότυπο δημοσίευμα αναφορικά με 'Γυναίκες με καμπύλες'
πατήστε εδώ http://www.blueshark.gr/gynaikes-me-kampyles/
Η πρώτη σειρά βίντεο είναι η Leahy και με τα μοντέλα Olivia Langdon, Sophie Sheppard, Stefania Ferrario και Margaret Macpherson, και συζητούν για προσωπικές εμπειρίες σε σχέση με την εικόνα του σώματος τους, και πως τελικά ξεπέρασαν τις ανασφάλειες που είχανε.
Και με τον τρόπο αυτό ρούχα plus size μας κάνουν να ενισχύσουμε το πόσο αναντικατάστατα είναι τα προϊόντα μας.
Εδώ έχετε τη δυνατότητα να ενημερώνεστε ρούχα μεγάλα μεγέθη
Επιπλέον σημειώνουμε ότι αν θέλετε να μάθετε με λεπτομέρειες σχετικά με ρούχα για παχουλές πατήστε εδώ http://www.blueshark.gr
The document discusses achieving sustained growth through establishing a go-to-market fit (GTMF) operating system. It emphasizes building depth in leadership and operational teams and taking a "franchise-model" mindset. The GTMF system should be optimized for speed and deliver a whole product solution. Key components include recruiting top talent, refining marketing, sales, product development and customer success based on metrics as the company doubles in size, and establishing a winning culture.
SurePath State of SMB SaaS Report - Feb 2017Mark MacLeod
The SurePath SMB Index tracks publicly traded companies focused on serving small and mid-sized businesses. In 2016, SurePath analyzed over 280 annual reports to select 35 companies for the index. The index is weighted based on total market capitalization and tracked against other benchmarks. In 2016, the top gaining companies in the index included Hubspot, Anthropic, and Bill.com. Meanwhile, the top losing companies were Demandware, Marketo, and Constant Contact. Overall, the SMB index showed positive growth, indicating the market opportunities for software companies targeting the SMB sector.
This document discusses key metrics and factors for evaluating social media platforms. It identifies high-level metrics like daily/monthly active users and retention rates. It also discusses measuring engagement through user actions and relationships. The document emphasizes the importance of understanding user behavior beyond total users to gauge quality of engagement. Cohort analysis and visualization tools are recommended for analyzing user data trends over time.
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Sarbanes-Oxley Section 404 requires companies to assess and report on the effectiveness of their internal controls. However, many companies have only addressed the requirements of Section 404 itself, which represents just the "tip of the compliance iceberg." To fully comply with the spirit of Sarbanes-Oxley, companies need to implement the integrated internal control framework as defined by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The COSO framework addresses five components of internal control - control environment, risk assessment, control activities, information and communication, and monitoring - that encompass controls over financial reporting as well as operational and compliance areas. Properly addressing all elements of the COSO framework
This document discusses corporate compliance with the Sarbanes-Oxley Act and achieving an effective internal control environment based on the COSO framework. It argues that while many companies have focused on complying with specific SOX sections like 404, true compliance requires addressing the full depth of the "compliance iceberg" as defined by COSO. This includes controls for operations, compliance with other regulations, and unique organizational processes. It also emphasizes that compliance requires adhering to the spirit of establishing effective controls, not just the letter of satisfying individual SOX sections. Monitoring and separate evaluation are key to ensuring controls are properly implemented and maintained throughout an organization.
The PCAOB implemented new rules to provide more transparency around public company audits. The new rules require disclosure of the engagement partner's name, the names and locations of other accounting firms involved in the audit that conducted at least 5% of the total audit hours, and the aggregate participation of other firms. Previously, only the lead audit firm was disclosed. The new rules aim to give financial statement users more complete information about who is responsible for the audit opinion.
How SOX changed the accounting industry when it was implemented. The background data that lead to the SOX overhaul and has it accomplished what it was drafted to do?
Topic: SOX; Type of paper: Essay; Subject: Accounting and Finance;
Academic Level: Undergraduate; Citation Style: Chicago; Language: English (U.S)
How financial reporting for public companies has changed since the E.pdfpristiegee
How financial reporting for public companies has changed since the Enron scandal in 2001.
Solution
Enron Scandal 2001
Enron a global Gas and Energy company incorporated in Omaha Nebraska and once
distinguished as the Nation’s 7th largest company. Listed on Forbs Fortune 500 as being among
the wealthiest companies listed on the stock exchange. Through this accumulation of “wealth”
Enron at one point held a robust market valuation, which was higher other large global
companies like AT&T. Many would call Enron a company that was “too big to fail”; this was
due to the company’s reported revenue milestone accomplishment of 100 billion dollars.
But what made the Enron scandal so compelling was the fact that it brought down accounting
giant Arthur Andersen too. It was a truly amazing situation, a conflation of corporate
wrongdoing which would change the accounting world forever.
Changes In Financial Reporting and Other Changes due to Enron Scandal 2001
SOX includes several gatekeeper provisions:
Requiring a company’s board of directors to have an Audit Committee composed solely of
independent directors.
Making the Audit Committee responsible for the appointment, compensation, and oversight of
the outside auditor and for establishing procedures for the confidential, anonymous submission
by company employees of concerns about accounting or auditing practices.
Creating a new agency, the Public Company Accounting Oversight Board (PCAOB), to
strengthen the outside audit function. The PCAOB sets standards involving auditing, quality
control, ethics, and audit reports and has authority to inspect, investigate, and discipline
registered public accounting firms.
Requiring attorneys who practice before the Securities and Exchange Commission (SEC) to
report material violations of the securities laws to a company’s chief legal officer or chief
executive officer. If those officers do not respond in an appropriate manner, the attorney is then
required to report the violations to the Audit Committee of the board or to another committee
composed solely of independent directors.
Enhance Regulatory Protections
Federal and state securities regulators and self-regulatory organizations play an important and
necessary role in corporate governance. They wield a broad and powerful array of sanctions, and
their enforcement actions serve as a strong deterrent against wrongdoing. The SEC’s
enforcement priorities, reflected in public speeches by its Commissioners and staff, help shape
corporate conduct.
Increase in Regulations after Sarbanes Oxley
The Sarbanes-Oxley Act initiated stringent regulations. The Act was composed of sixty-six
sections, some long and others short. Each section dealt with a different part of the reporting
cycle (Schaeffer, 2006). These sections are contained within eleven titles, primarily dealing with
the issue of internal control. The eleven titles of SOX are as follows: Public Company
Accounting Oversight Board, auditor independence, corporate respo.
Compliance Auditing in Regulatory EnvironmentsA series of high v.docxbreaksdayle
Compliance Auditing in Regulatory Environments
A series of high visibility examples of corporate fraud motivated the federal government to step in and create laws to hold corporations more accountable to the public and to their shareholders. Two of the more well-known examples are Gramm-Leach-Bliley (GLB Act) passed in 1999 and Sarbanes-Oxley Act (SOX) passed in 2002. Both of these laws have information security and privacy components that impact financial management and creation of financial statements within certain organizations.
The CFO of a large investment company that is publically traded on the American Stock Exchange is preparing for a significant external audit as part of preparing the organization for creation of the annual financial statements and report to shareholders. He hires you establish what obligations they have under the GLB and SOX laws that relate to creation of those financial statements.
Use the study materials and engage in any additional research needed to fill in knowledge gaps. Then discuss the following:
Describe the steps necessary to determine what specific criteria within the GLB and SOX laws pertain to this particular type of organization.
Identify the process that will identify how well the organization is in compliance with the criteria.
Explain the selection of team members and process steps from being hired to determine the relevant parts of GLB and SOX through reporting on the identification of compliance levels.
...
The Sarbanes-Oxley Act of 2002 was implemented to restore investor confidence in the wake of major corporate accounting scandals. It aims to improve corporate governance and financial disclosure. The act establishes new or enhanced standards for all U.S. public company boards, management, and public accounting firms. It requires companies and their executives to be more responsible and transparent in their financial reporting.
This document is the Combined Code on Corporate Governance published by the Financial Reporting Council in July 2003. It provides guidance to companies on good governance practices related to board composition and effectiveness, remuneration, accountability, relations with shareholders, and the role of institutional shareholders. The Code consists of main principles and supporting provisions, and takes a "comply or explain" approach where companies report on how they apply the principles and either comply with the provisions or explain any non-compliance. It aims to promote high quality governance and transparency through balanced leadership, accountability, and shareholder relations at listed companies.
This document discusses international corporate governance, focusing on the UK's "comply or explain" system and comparing it to China's system. It notes that while the UK system provides flexibility, it has weaknesses like lack of compliance and unclear guidance on director duties. The "comply or explain" approach has received praise but questions remain about ensuring best practices are followed. China's system is also analyzed, looking at reforms and loopholes. Overall the document provides a critical analysis of both the UK and Chinese corporate governance systems.
Dr. Rick Warren founded Warren Global Corp in 1992 after leaving PricewaterhouseCoopers. Warren Global became renowned for its expertise in Sarbanes-Oxley compliance after completing over 2,000 internal control audits. Recently, the G-20 nations mandated the adoption of global accounting standards (IFRS) to replace domestic standards like GAAP. In response, Warren Global developed the Millennium package to help companies comply with IFRS in a cost-effective manner. The article also discusses how accounting regulators and standards-setting groups are driving the adoption of IFRS, including the potential addition of IFRS competencies to the CPA exam.
The Cost Of Sarbanes Oxley Scott S Powell Barrons 5 3 05Scott Powell
The Sarbanes-Oxley Act of 2002 (Sarbox) was intended to prevent fraud and improve corporate governance, but it has become the most costly and counterproductive regulation imposed on public companies. Complying with Sarbox costs $35 billion annually, far more than estimated. It has empowered auditors but not improved fraud detection. While some reforms are beneficial, the costs outweigh benefits and Sarbox hinders innovation. Making some provisions optional could help address its negative impacts, especially on small companies and startups.
Case 1 3 politicalization of accounting standards some accountaRAJU852744
The document discusses the increasing politicization of accounting standard setting. It provides examples of the Committee on Accounting Procedure (CAP), Accounting Principles Board (APB), and Financial Accounting Standards Board (FASB) to show how they have become more influenced by various interest groups over time. The CAP focused only on specific problems and lacked representation from interest groups. The APB aimed to address deficiencies of the CAP but also became problem-focused. The FASB now represents diverse stakeholders but still shows the evolutionary process towards greater politicization of standards.
Case 1-3 Politicalization of Accounting StandardsSome accountaTawnaDelatorrejs
Case 1-3 Politicalization of Accounting Standards
Some accountants have said that politicalization in the development and
acceptance of generally accepted accounting principles (i.e., standard setting) is
taking place. Some use the term politicalization in a narrow sense to mean the
influence by governmental agencies, particularly the SEC, on the development of
generally accepted accounting principles. Others use it more broadly to mean the
compromising that takes place in bodies responsible for developing these principles
because of the influence and pressure of interested groups (SEC, American
Accounting Association, businesses through their various organizations, Institute
of Management Accountants, financial analysts, bankers, lawyers, etc.).
Required:
A.) Do the reasons these groups were formed, their methods of operation while in existence, and the reasons for the demise of the first two indicate an increasing politicalization (as the term is used in the broad sense) of accounting standard setting? Explain your answer by indicating how the CAP, APB, and FASB operated or operate. Cite specific developments that tend to support your answer.
CAP. The Committee on Accounting Procedure, CAP, which was in existence from 1939 to 1959, was a natural outgrowth of AICPA committees which were in existence during the period 1933 to 1938. The committee was formed in direct response to the criticism received by the accounting profession during the financial crisis of 1929 and the years thereafter. The authorization to issue pronouncements on matters of accounting principles and procedures was based on the belief that the AICPA had the responsibility to establish practices that would become generally accepted by the profession and by corporate management.
As a general rule, the CAP directed its attention, almost entirely, to resolving specific accounting problems and topics rather than to the development of generally accepted accounting principles. The committee voted on the acceptance of specific Accounting Research Bulletins published by the committee. A two-thirds majority was required to issue a particular research bulletin. The CAP did not have the authority to require acceptance of the issued bulletins by the general membership of the AICPA, but rather received its authority only upon general acceptance of the pronouncement by the members. That is, the bulletins set forth normative accounting procedures that "should be" followed by the accounting profession, but were not "required" to be followed.
It was not until well after the demise of the CAP, in 1964, that the Council of the AICPA adopted recommendations that departures from effective CAP Bulletins should be disclosed in financial statements or in audit reports of members of the AICPA. The demise of the CAP could probably be traced to four distinct factors: (1) the narrow nature of the subjects covered by the bulletins issued by the CAP, (2) the lack of any theoretical groundwork in esta ...
The Sarbanes-Oxley Act (SOX) was implemented in 2002 in response to major corporate accounting scandals. SOX aimed to improve corporate governance and transparency by regulating auditor independence and requiring internal control assessment. It has resulted in more thorough audits but also increased expenses for businesses. While SOX has strengthened financial reporting, there is debate around its costs and some provisions may disproportionately burden smaller companies.
The document summarizes key aspects of the development of financial accounting standards and principles in the United States. It discusses the roles of organizations like the SEC, FASB, AICPA and others in establishing GAAP. It also outlines challenges to financial reporting like providing nonfinancial metrics, forward-looking information and reconciling US GAAP with IFRS. Ethical considerations are an important part of the accounting profession.
The document provides an overview of the Sarbanes-Oxley Act of 2002 (SOX) which was passed in response to major corporate accounting scandals to increase transparency and prevent fraud. SOX established new regulations and oversight for public companies, accounting firms, and management. It created the Public Company Accounting Oversight Board to regulate audits and required companies to comply with standards around financial disclosures, internal controls and corporate governance. SOX also increased penalties for financial misconduct and expanded requirements for corporate responsibility and financial disclosure.
The Sarbanes-Oxley Act at 15 (EY Publication)Azhar Qureshi
The Sarbanes-Oxley Act of 2002 (SOX) established the Public Company Accounting Oversight Board (PCAOB) to oversee audits of public companies and improve accountability in financial reporting. SOX also strengthened corporate governance and financial disclosure. The PCAOB registers audit firms, inspects audits for compliance, and sets auditing standards. SOX has improved audit quality and increased transparency and oversight of both companies and auditors. While some provisions like internal control reporting have faced criticism, SOX overall increased investor confidence in US financial markets.
1. Arnold ITP M.doc 6/17/2009 1:10 PM
1
GIVE SMALLER COMPANIES A CHOICE: SOLVING
SARBANES-OXLEY SECTION 404 INEFFICIENCY
WITH OPTIONAL COMPLIANCE
Paul P. Arnold*
This Note argues that smaller public companies should have the option to opt out
of Section 404 of the Sarbanes-Oxley Act of 2002. Optional compliance is eco-
nomically preferable to the current approach of mandatory compliance. Companies
that choose to comply with Section 404 will send a signal to the financial markets
that their internal controls meet the high standards Section 404 demands, and
investors will reward such companies if they actually value the benefit of that com-
pany's additional controls. Similarly, companies that benefit less from additional
internal accounting will be able to avoid Section 404’s high costs. To clarify the
economics of this argument, this Note develops a framework that models the choice
companies make when Section 404 compliance is optional. Under the proposed sys-
tem, independent auditors would continue to certify Section 404 compliance,
providing clarity and simplicity for investors. This Note also examines the issues
of imperfect market information and agency costs, concluding that they are not as
problematic as they initially appear, and that they are still preferable to the exces-
sive costs and burdens Section 404 places on smaller public companies. Finally,
this Note argues that the Securities and Exchange Commission has the legal au-
thority to adopt optional Section 404 compliance given Sarbanes-Oxley’s text and
legislative intent.
Introduction
Section 404 is a source of more agitation than any other re-
quirement of the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley).1
Critics complain that its internal accounting controls, as currently
implemented, are too onerous and costly. This Note argues that
smaller public companies should be able to opt out of Section 404
compliance. A system of optional Section 404 compliance is eco-
nomically preferable to the current approach of mandatory
compliance. Companies that choose to comply with Section 404
will send a signal to the financial markets that their internal
* Associate, McKinsey & Company. I am very grateful to Professor Vikramaditya
Khanna, Professor S.D. Lee, Professor Adam Pritchard, Professor Larry Ribstein, Benedict
Schweigert, Michelle Lee, Silvia Vannini, Jeremy Suhr and Mark Oblad, for their support
and feedback. Thanks also to Lily Tong for helping me make graphs in Adobe Illustrator. I
wrote parts of this Note as a John M. Olin fellow and am thankful to the Olin Foundation
for their support.
1. Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745 (codified at various
sections of 11, 15, 18, 28, and 29 U.S.C. (Supp. III 2003)).
2. Arnold ITP M.doc 6/17/2009 1:10 PM
2 University of Michigan Journal of Law Reform [Vol. 42:4
controls meet the high standards Section 404 demands, and inves-
tors will reward such companies if they actually value compliance.
Under the proposed system of optional internal controls, a com-
pany’s independent auditors would continue to certify Section 404
compliance. Auditor certification lends clarity and simplicity to the
markets, and signals that the certified company meets an accept-
able standard.2
Part I of this Note introduces Section 404 and traces the major
criticisms of it. This Part considers several proposed reforms and
argues that none are fully satisfactory. In Part II, the Note argues
that optional Section 404 compliance is economically preferable to
mandatory compliance because it allows smaller companies to
adopt the optimal level of internal control procedures. For those
companies for which Section 404’s internal controls are desirable,
financial markets will reward compliance through higher stock
prices. At the same time, market mechanisms will allow companies
that benefit less from additional internal accounting to avoid Sec-
tion 404’s high costs. To clarify this argument, this Note develops
an economic framework that models the choice companies make
when Section 404 compliance is optional. Like all economic
frameworks, this framework is an ideal. In the real world, markets
may fall short of perfectly valuing internal controls, and agency
costs can distort managerial incentives. This Note examines these
issues and concludes that they are not as problematic as they ini-
tially appear, and that they are still preferable to the excessive costs
and burdens Section 404 places on smaller public companies. Fi-
nally, Part III argues that the Securities and Exchange Commission
(SEC) has the legal authority to adopt optional Section 404 com-
pliance, given Sarbanes-Oxley’s text and legislative intent.
I. The Controversy and Proposed Reforms
This Part introduces the Section 404 controversy and the sur-
prisingly high costs of implementing Section 404’s mandatory
internal controls. Part I.A gives an overview of these costs and the
public criticisms of them. Part I.B briefly describes the various pro-
2. The idea of optional Sarbanes-Oxley compliance is not new. Indeed, Roberta
Romano suggests adopting an opt-in system for Sarbanes-Oxley generally. Roberta Romano,
The Sarbanes-Oxley Act and the Making of Quack Corporate Governance, 114 Yale L. J. 1521
(2005). Professors Henry Butler and Larry Ribstein suggest adopting an opt-in system for
Section 404 in particular. Henry N. Butler & Larry E. Ribstein, The Sarbanes-Oxley
Debacle: What We’ve Learned; How to Fix It 88 (2006). No commentator, however, has
explained why optional Section 404 compliance is economically preferable to mandatory
compliance. This Note attempts to fill that gap.
3. Arnold ITP M.doc 6/17/2009 1:10 PM
Summer 2009] Give Smaller Companies a Choice 3
posed reforms that have arisen in response to the costs problem
and concludes that none of these proposed reforms are fully satis-
factory.
A. The Section 404 Controversy
Sarbanes-Oxley was enacted in the heated political climate fol-
lowing the accounting scandals of Enron and WorldCom. Congress
hastily passed the Act without a clear understanding all of its provi-
sions.
3
Public criticism of Sarbanes-Oxley is widespread, prompting
economist and former Chairman of the Federal Reserve Alan
Greenspan to describe the Act as a “nightmare,” and conclude that
most of its provisions should be scrapped as soon as possible.4
New
York City Mayor Michael Bloomberg and New York Senator Charles
Schumer are concerned that the costs of compliance are helping
London and Hong Kong to become the markets of choice for
companies making their first public offerings.5
Though Sarbanes-
Oxley ushered in a range of new regulations, the provision that
receives the most attention is Section 404. In the fall of 2006, a
blue-ribbon group of prominent independent business executives
and academics called for the SEC to ease Section 404’s restrictions,
which it concluded are threatening the U.S.’s leadership position
in the global capital markets.6
While Section 404 requires public companies to establish and
maintain an “adequate control structure” and “procedures for fi-
nancial reporting,” the statute leaves interpreting the meaning of
this broad language means to the SEC through its rule-making
process.7
On its face, the language of Section 404 does not appear
to be too demanding:
3. Romano, supra note 2.
4. Larry E. Ribstein, Greenspan, Bloomberg, and Me on SOX, http://busmovie.
typepad.com/ideoblog/2006/09/greenspan_bloom.html (Sept. 28, 2006 07:15 AM).
5. Id.; Larry E. Ribstein, Schumer and Bloomberg: Cultural Warriors, http://
busmovie.typepad.com/ideoblog/2006/11/page/4/ (Nov. 1, 2006 06:07 AM). But see Craig
Doidge, George Andrew Karolyi & René M. Stulz, Has New York Become Less Competitive in
Global Markets? Evaluating Foreign Listing Choices over Time (Fisher Coll. of Bus., Working Pa-
per No. 2007-03-012, 2007), available at http://ssrn.com/abstract=982193 (finding that the
valuation premiums of listing in New York have not been seriously eroded by Sarbanes-
Oxley).
6. Comm. on Capital Mkts. Regulation, Interim Report (2006) [hereinafter
Independent Committee Report], available at http://www.capmktsreg.org/pdfs/
11.30Committee_Interim_ReportREV2.pdf; Greg Ip, Kara Scannell & Deborah Solomon,
Panel Urges Relaxing Rules for Oversight, Wall St. J., Nov. 30, 2006, at C1.
7. The SEC is to “prescribe rules” governing these internal controls and reporting.
Sarbanes-Oxley Act of 2002 § 404, 15 U.S.C. § 7262 (Supp. III 2003). To further implement
its mandates, Sarbanes-Oxley created the Public Company Accounting Oversight Board
4. Arnold ITP M.doc 6/17/2009 1:10 PM
4 University of Michigan Journal of Law Reform [Vol. 42:4
(a) RULES REQUIRED—The Commission shall prescribe
rules requiring each annual report required by section 13(a)
or 15(d) of the Securities Act of 1934 to contain an internal
control report, which shall—
(1) state the responsibility of management for establishing
and maintaining an adequate internal control structure and
procedures for financial reporting.
(2) contain an assessment . . . of the effectiveness of the in-
ternal control structure and procedures of the issuer for
financial reporting.
(b) INTERNAL CONTROL EVALUATION AND
REPORTING—With respect to the internal control assess-
ment required by subsection (a), each registered accounting
firm that prepares or issues the audit report for the issuer
shall attest to, and report on, the assessment made by the
management of the issuer.8
In practice, however, the accounting rules adopted under Sec-
tion 404 have proven very costly. One study estimates that the total
average cost of Section 404 compliance for accelerated filers was
$2.9 million in 2006.9
This drastically exceeds the SEC’s initial es-
timate that compliance would cost $91,000 per company.10
Although these costs have decreased over time,11
they are still out
of line with initial expectations. Moreover, the costs of Section 404
(PCAOB). The PCAOB works with the SEC to develop internal controls and auditor attesta-
tion standards.
8. Sarbanes-Oxley Act of 2002 § 404.
9. Press Release, Fin. Executives Int’l, FEI Survey: Management Drives Sarbanes-Oxley
Compliance Costs Down by 23%, but Auditor Fees Virtually Unchanged (May 16, 2007) (on file
with University of Michigan Journal of Law Reform) [hereinafter FEI Survey], available at
http://fei.mediaroom.com/index.php?s=43&item=193. This study only includes “acceler-
ated filers”—those companies with a market capitalization above $75 million. It does not
include smaller “non-accelerated filers,” which have been given more time to come into
compliance.
10. Final Report of the Advisory Comm. on Smaller Public Companies to the U.S. Sec.
& Exch. Comm’n, Exchange Act Release No. 8666, 71 Fed. Reg. 11090, 11099 (Apr. 23,
2006) [hereinafter Final Report]. The Committee on Capital Market Regulations estimates
the costs of implementing and maintaining the internal controls required by Section 404
exceeds initial expectations by a factor of 35. Independent Committee Report, supra note
6, at 126. Representative Michael Oxley, a co-drafter of Sarbanes-Oxley, said that compliance
costs for companies have proved “more costly than anticipated.” Sarbanes-Oxley Audits Too
Costly, Regulator Says, Int’l Herald Trib., Sept. 20, 2006, at 14. SEC Chairman Cox con-
ceded that the “greater than anticipated costs” of Section 404 compliance are “one notable
exception” to the Sarbanes-Oxley’s benefits. Id.
11. FEI Survey, supra note 9.
5. Arnold ITP M.doc 6/17/2009 1:10 PM
Summer 2009] Give Smaller Companies a Choice 5
extend beyond merely audit fees: Section 404 creates monitoring
and opportunity costs throughout the corporate structure. Section
404 compliance redirects management from its primary task of
generating earnings to the secondary task of overseeing a large ac-
counting endeavor.
12
Both directors and shareholders must spend
more time ensuring that management is complying.
If corporate America is pained by the costs of Section 404 com-
pliance, our smallest public companies feel the sharpest sting.
Section 404 disproportionately burdens smaller public compa-
nies.13
Some estimate compliance costs smaller public companies
25 times more than it costs the largest public companies, when
compliance costs are measured as a percentage of revenue.
14
As a
result, smaller companies may be driven out of the public markets
by the costs of complying with Section 404. Emerging smaller pri-
vate companies increasingly forgo a public offering.15
choosing
instead to be sold privately16
or to list on foreign exchanges with
less regulatory burden.
17
Smaller companies that are already public
12. Butler & Ribstein, supra note 2, at 50–51.
13. See Final Report, supra note 10, at 11101–03; U.S. Gov’t Accountability Off.,
Sarbanes-Oxley Act: Consideration of Key Principles Needed in Addressing Imple-
mentation for Smaller Public Companies 14–20 (2006) [hereinafter GAO Report]; see
also Richard Hill & Rachel McTague, Oxley, Baker Tell SEC Agency Has Power to Mitigate SOX
Provisions, 38 Sec. Reg. & L. Rep. 449, 449 (2006). There is little mystery to this dispropor-
tionate burden: larger companies benefit from economies of scale in implementing internal
controls.
14. See Final Report, supra note 10, at 11101.
15. U.S. IPO activity has decreased markedly in the last several years. There is much
debate as to the cause. See, e.g., Nat’l Venture Capital Ass’n, Venture Capital IPO Vol-
ume Plummeted in Q3 (2006) (on file with the University of Michigan Journal of Law
Reform), available at http://www.nvca.org/pdf/Exitpollfinalq32006.pdf (showing the de-
cline in venture-backed IPOs since 2004); Joseph W. Bartlett, Editorial, The Danger in Losing
IPOs, Wash. Post, Aug. 2, 2006; Rebecca Buckman & Kara Scannell, Venture Capital: Do
U.S. Regulations Drive Away Start-Ups?, Wall St. J., Apr. 27, 2006, at C5.
16. William J. Carney, The Costs of Being Public After Sarbanes-Oxley: The Irony of ‘Going
Private’, (Emory Law & Econ. Research Paper Series, Working Paper No. 05-4, 2005), avail-
able at http://ssrn.com/abstract=672761 (finding an increasing number of public
companies choosing to terminate public reporting); Ehud Kamar, Pinar Karaca-Mandic &
Eric L. Talley, Going-Private Decisions and the Sarbanes-Oxley Act of 2002: A Cross-Country Analy-
sis, 25 J.L. Econ. & Org. (forthcoming Spring 2009) (on file with the University of Michigan
Journal of Law Reform), available at http://ssrn.com/abstract=901769 (finding evidence
that Sarbanes-Oxley may have pushed smaller companies out of the public markets).
17. Ernst & Young, Transitions: Global Venture Capital Insight Report 2
(2006) (noting that the London Stock Exchange’s Alternative Investment Market is becom-
ing the foreign exchange of choice for smaller companies facing their first public offering);
Ken Livingstone, Being Most Global is London’s Trump Card, London Times, June 18, 2006, at
13 (exploring London’s rise in a global market for public company listings); Leonce
Bargeron, Kenneth Lehn & Chad Zutter, Presentation to the American Enterprise Institute:
Sarbanes-Oxley and Corporate Risk-Taking, (June 18, 2007) (on file with the University of
Michigan Journal of Law Reform), available at http://www.aei.org/docLib/20070615_
6. Arnold ITP M.doc 6/17/2009 1:10 PM
6 University of Michigan Journal of Law Reform [Vol. 42:4
may choose to “go private” and enjoy regulatory cost savings,18
or to
“go dark” and move to less regulated over-the-counter exchanges.
19
Thus, mandatory Section 404 compliance is inefficient because
the costs of compliance distort companies’ decisions about
whether to be publicly traded or privately held. Being a public
company can offer advantages. All else being equal, a company will
prefer having the choice of whether to pursue or forgo those ad-
vantages in the public markets. Given these tradeoffs, companies
will make the choice they believe maximizes their value. Some ar-
gue that if smaller companies cannot afford the costs of being
public that Section 404 imposes, then perhaps they should not be
public. But where the private costs imposed by Section 404 out-
weigh the public benefits, the additional costs of compliance can
preclude a company from making an otherwise optimal choice
about the relative advantages20
and burdens21
of being publicly
traded. Additional and unnecessary transaction costs further dis-
tort this choice. In contrast, when the regulations that govern
being a public company impose private costs equal to the public
benefit, then the firm’s self-interested choices will also be the op-
timal choices for society. Thus, the aim of Section 404 regulation
should be to regulate internal controls only up to the point where
private costs equal public benefits. As demonstrated in Part II, op-
tional compliance is such a system.
B. Proposed Reforms
Several reforms have been suggested to address the shortcom-
ings of Section 404. Assuming that legislative action is at best a
remote possibility,22
this Part describes three basic options for regu-
latory reform: lowering the costs of compliance, increasing the
LehnSarbanes-Oxley.pdf (finding that post-Sarbanes-Oxley, the probability of a company
pursuing an IPO in the U.K rose sharply).
18. See Kamar et al., supra note 16, at 2; Andrew Skouvakis, Comment, Exiting the Public
Markets: A Difficult Choice for Small Public Companies Struggling with Sarbanes-Oxley, 109 Penn.
St. L. Rev. 1279, 1280–87 (2005).
19. See Paul Rose, Balancing Public Market Benefits and Burdens for Smaller Public Compa-
nies Post Sarbanes-Oxley, 41 Willamette L. Rev. 707, 724–36 (2005).
20. The advantages of being public include increased liquidity, access to future capital,
increased public awareness and prestige, the ability to attract and retain employees with
liquid stocks and options, and the ability to more easily sell and spread risks.
21. The burdens of being public include the costs of offering public securities, in-
creased regulatory and public scrutiny, management’s focus on short-term earnings, and
potentially increased monitoring and agency costs.
22. See infra note 59.
7. Arnold ITP M.doc 6/17/2009 1:10 PM
Summer 2009] Give Smaller Companies a Choice 7
benefits of compliance, and adjusting the scope of Section 404’s
application.
23
1. Lower the Costs of Compliance
One proposed reform is to lower the costs of compliance for
smaller public companies. Three possible mechanisms to achieve
this include revising the standards that companies and auditors
must meet,24
improving the auditing process,25
or providing guid-
ance to companies about how to comply in a cost-effective manner.
The Government Accountability Office (GAO)
26
and former SEC
Chairman Christopher Cox recommend a cost-lowering approach,
27
and the Public Company Accounting Oversight Board (PCAOB)
rules attempt to reduce compliance costs through risk-based audit-
ing.28
However, cutting costs alone is insufficient to solve the problem.
While changing the incentives that lead auditors to over-enforce is
commendable, it is unlikely to be a complete solution.29
Neither is
simply scaling back the internal control requirements, because
even with reductions in the costs of compliance, significant costs
will likely remain. More importantly, even if costs are reduced such
that they are economically worthwhile for most public companies,
they will not be economically worthwhile for all such companies.
23. See Rose, supra note 19, at 737–47 (discussing proposals to adjust the balance of
smaller public companies’ benefits and burdens post Sarbanes-Oxley).
24. See Joseph A. Grundfest & Steven E. Bochner, Fixing 404, 105 Mich. L. Rev. 1643,
1660–66 (2007) (proposing a restatement of the standards that auditors apply).
25. See id. at 1667–69 (proposing procedures to offset auditors’ incentives to push for
overcompliance).
26. GAO Report, supra note 13, at 58.
27. Press Release, U.S. Sec. & Exch. Comm’n, SEC Announces Next Steps for Sar-
banes-Oxley Implementation (May 17, 2006), http://www.sec.gov/news/press/2006/2006-
75.htm (statement of Chairman Cox) (“By providing practical guidance to companies, by
working with the [PCAOB] on their forthcoming revised standard for auditors, and by ex-
amining how the PCAOB inspection process is succeeding in increasing the efficiency and
cost-effectiveness of the audit process, we will take a giant step toward ‘getting it right’ when
it comes to Section 404 compliance.”).
28. Press Release, U.S. Sec. & Exch. Comm’n, SEC Approves New Guidance for Com-
pliance with Section 404 of Sarbanes-Oxley (May 23, 2007), http://www.sec.gov/news/
press/2007/2007-101.htm (last visited May 15, 2009); Auditing Standard No. 5, PCAOB
Release No. 2007-005A (June 12, 2007).
29. Professor Grundfest admits as much. He has said, “‘This may be a bell that can’t be
un-rung . . . . The audit firms have already incorporated a lot of the inefficient 404 process
into their integrated audits, and once audit firms have processes in place, it’s very hard to
persuade them to back off and ease up on those processes.’” Kara Scannell & Deborah
Solomon, Business Wins Its Battle to Ease A Costly Sarbanes-Oxley Rule, Wall St. J., Nov. 10,
2006, at A14.
8. Arnold ITP M.doc 6/17/2009 1:10 PM
8 University of Michigan Journal of Law Reform [Vol. 42:4
This is true of business regulations generally: we often impose
needless burdens on some companies because we believe that ap-
plying the regulation broadly is more beneficial, on the whole,
than attempting to tailor the regulation more narrowly. However,
as discussed in Part II, Section 404 presents a different situation.
Here, where the market can reward or punish compliance through
the company’s share price, an optional compliance rule has the
unusual benefit of narrowing the regulation’s implementation to
only the specific companies for which it is economically desirable.
2. Increase the Benefits of Compliance
Another proposed reform is to increase the benefits of compli-
ance.30
This solution is not only inadequate, but also wishful
thinking. It is inadequate for the reasons that the cutting costs ap-
proach is inadequate—increasing benefits in general is unlikely to
increase the benefits for every company, and is unlikely to be
enough to outweigh the costs. It is wishful thinking because signifi-
cant increases in the benefits of compliance may not be possible
for smaller companies. Internal control systems are essentially
monitoring systems. Small companies are likely to benefit less from
internal controls than their larger brethren because they have less
need for internal monitoring. As the size of a company increases, it
becomes more difficult for shareholders, executives, board mem-
bers, and employees to monitor each other. Smaller companies, by
contrast, are typically more close-knit, such that each participant is
much more likely to know the actions of the others. In these situa-
tions, a monitoring system adds much less value.
3. Change the Companies to which Section 404 Applies
The third solution—and the solution most relevant for this
Note—is to carve out exceptions for the companies to which Sec-
tion 404 applies. The proposal by the SEC’s Advisory Committee
on Smaller Public Companies (the Advisory Committee) is perhaps
the most noteworthy example of this approach. The SEC commis-
sioned the Advisory Committee to investigate the impact of
Sarbanes-Oxley on smaller public companies. The Advisory Com-
mittee’s Final Report (Final Report) is a model for those who
advocate exemptive relief to smaller public companies from Sec-
30. Rose, supra note 19, at 737–39.
9. Arnold ITP M.doc 6/17/2009 1:10 PM
Summer 2009] Give Smaller Companies a Choice 9
tion 404’s burden. The Final Report recommends, among other
things, exempting smaller companies from Section 404 compli-
ance.
31
Toward this end, the Final Report identifies certain
recommendations as “highest priority.”32
These highest priority recommendations can be divided into two
parts. The first is to establish a system of scaled regulations, where
smaller public companies would be subjected to different regula-
tory requirements depending on their market size.
33
The second is
that microcap and smallcap companies, or companies with market
capitalizations less than $787.1 million, should be exempted from
the requirements of Section 404 compliance “[u]nless and until a
framework for assessing internal control over financial reporting
for [smaller public] companies is developed that recognizes the
characteristics and needs of those companies.”34
The Advisory Committee meant for its approach to complement
any cost-reducing solutions, but the Final Report is cautious not to
put too much faith in cost cutting. Consequently, it recommends
that the SEC allow the small company exemption unless and until
a cost-reducing solution becomes viable. The SEC has not yet fol-
lowed the Advisory Committee’s recommendation to exempt
smaller public companies.
31. Final Report, supra note 10, at 11092–94. The independently organized Committee
on Capital Markets Regulation endorsed a more narrow approach. Independent Commit-
tee Report, supra note 6, at 133.
32. Final Report, supra note 10, at 11092–94.
33. Id. at 11092 (data in table). Microcap companies, the smallest on the proposed
scale, are those with a market capitalization of less than $128.2 million. Such companies
represent 52.6 percent of all U.S. public companies and 1% of total U.S. equity market capi-
talization. Smallcap companies are those with a market capitalization between $128.2
million and $787.1 million (inclusive), representing 25.9 percent of all U.S. public compa-
nies and 5 percent of total U.S. equity market capitalization. Combined, the smaller public
companies (i.e. microcap and smallcap companies) that the Committee recommends be
given favorable treatment represent only 6 percent of the total U.S. equity market, but 78.5
percent of all the public companies in this country. Id. The Committee recommends lesser
requirements for both microcap and smallcap companies.
34. Id. at 11093. Microcap companies would be afforded complete Section 404 exemp-
tion, while smallcap companies would be afforded “relief from external auditor involvement
in the Section 404 process . . . .” Id. Skeptics cite the fact that four out of every five of public
companies would be exempted under this proposal. This is a bit misleading: smaller public
companies represent a far smaller risk to the economy that the number of companies sug-
gests. “In all, the exemption would cover firms accounting for only 6 percent of total
American stock market value, leaving 94 percent of public companies by value still subject to
Section 404.” The Trial of Sarbanes-Oxley, Economist, Apr. 22, 2006, at 60.
10. Arnold ITP M.doc 6/17/2009 1:10 PM
10 University of Michigan Journal of Law Reform [Vol. 42:4
II. Economic Argument for an Opt-Out System
Optional Section 404 compliance—that is, allowing each com-
pany to choose whether the internal control standards set by the
PCAOB are appropriate for its situation—is economically prefer-
able to mandatory compliance for smaller public companies. After
reviewing the costs and benefits of Section 404 compliance, Part
II.A develops an economic framework that explains a company’s
choice to comply when compliance is optional. In short, compa-
nies choose to comply when it maximizes their shareholders’
benefits. Thus, mandatory compliance is unnecessary to protect
the shareholders’ interests. Moreover, optional compliance for in-
dividual companies is preferable regardless of the actual effect
compliance has on share prices in the aggregate. Part II.B discusses
how shareholders internalize the costs of Section 404 compliance.
Because shareholders internalize compliance costs, they may exer-
cise greater oversight over the management and thus alleviate
some of the concerns that arise when the management’s incentives
diverge from those of the shareholders. Part II.C explains why
auditor certification of a company’s Section 404 compliance adds
value and solves a market information problem that existed prior
to the passage of Sarbanes-Oxley. Finally, Part II.D argues that op-
tional compliance is best suited to smaller companies.
A. Choosing to Comply
The choice to comply with optional internal controls, as defined
by the PCAOB, is an economic decision. Stated simply, companies
balance the cost and benefits of compliance and pursue the choice
that maximizes their share value. Investors need not worry because
companies will choose to comply when the investors value it. This
is, of course, a simplified view of the economics—it assumes away
some of the thornier problems like agency costs or the possibility
of a private solution. These various problems will be addressed in
turn; the more nettlesome issues are best addressed, however, only
after first laying a basic economic foundation.
The direct costs of compliance with Section 404 include creat-
ing, maintaining, and auditing internal controls. Indirect costs to
society include companies delisting when regulations are too bur-
densome and losing companies who choose to list abroad.35
Opportunity costs exist too, as management’s attention is diverted
35. Butler & Ribstein, supra note 2, at 88.
11. Arnold ITP M.doc 6/17/2009 1:10 PM
Summer 2009] Give Smaller Companies a Choice 11
from its core concerns of delivering strong earnings and innova-
tion is lost because companies must channel resources into
compliance. Though direct costs have fallen over time,
36
they are
likely to remain significant.
Compliance also has its benefits. It is easier to monitor and pre-
vent fraud when good internal controls are in place.37
Shareholders
are spared the trouble of investigating the company’s internal con-
trols, and are able to rely on the auditor’s attestation that the
controls meet at least a certain minimum standard. Thus, by them-
selves, good internal controls should make the company more
valuable, and if the benefits of compliance outweigh the costs, the
company’s share price will reflect it.
A company’s share price will reflect whether there is a net bene-
fit or a net cost of compliance for that individual company. If the
market values good accounting practices more than it costs to im-
plement them, the share price will rise; if the costs outweigh the
benefits, the share price will fall. In this way, the market disciplines
managers to carefully decide whether to adopt internal control
measures. Managers will respond to the wishes of the shareholders,
and the market pays for compliance in precisely those companies
that benefit from it the most.
Of course, the market will not always perfectly value compliance.
Financial markets are prone at times to make mistakes—to over or
underestimate the value of a change in the company. There is
much literature on the degree to which markets really do incorpo-
rate new information, some of which suggests that markets do not
seem to take notice of changes in corporate governance.38
Address-
ing these issues is beyond the scope of this Note. However, the
argument for optional Section 404 compliance only assumes that
the markets roughly and approximately value good internal con-
trols most of the time. It is fair to assume that the market will
sometimes fail to fully value internal controls, and that some com-
panies for which additional internal controls are undervalued by
the market will not have the economic incentive to adopt other-
wise socially beneficial internal controls. Nonetheless, if there are
real economic costs when the markets fail to accurately value
36. FEI Survey, supra note 9.
37. Although internal controls prevent fraud, we should not attempt to abolish all
fraud—rather, there is an optimal amount of fraud. When the benefits of good internal
controls are greater than the losses caused by fraud, then more and better accounting is
desirable up until the benefits equal the costs. See Butler & Ribstein, supra note 2; Carney,
supra note 16, at 1.
38. Robert Daines & Michael Klausner, Do IPO Charters Maximize Firm Value? Antitake-
over Protection in IPOs, 17 J.L. Econ. & Org. 83 (2001) (arguing that the market does not
seem to value antitakeover provisions in IPOs).
12. Arnold ITP M.doc 6/17/2009 1:10 PM
12 University of Michigan Journal of Law Reform [Vol. 42:4
internal controls, this Note assumes that such costs are outweighed
by those associated with overregulating small companies with man-
datory compliance.
If compliance is optional, the choice of whether to comply is an
economic one. Familiar economic concepts help illustrate this
choice. The analysis clarifies not only that mandatory compliance
is inefficient, but also that optional compliance increases share-
holder welfare. A series of graphs demonstrates the idea.
Figure 1
$
Level of
Internal Controls
MC
MB
c*
Figure 1 represents a company’s internal control decision when
there are no mandatory internal control regulations. Each firm has
unique marginal cost and marginal benefit curves depending on
their individual circumstances, denoted by MC and MB. Absent
regulation, a firm will maximize its value and thus its share price
where the marginal cost curve meets the marginal benefit curve.
The benefit-optimizing equilibrium is denoted by “c*.”
39
This is the
rational level of internal controls that a company will produce
without regulation. This natural equilibrium could be more or less
than the level of controls required by mandatory Section 404 com-
pliance.
Internal controls can be inefficient, however, whenever a com-
pany maintains internal controls different from the equilibrium
denoted by c* in Figure 1. While it is possible that a company
could either over or underproduce internal controls, the latter is
of little concern because a company underproducing internal con-
trols will correct itself naturally, as it benefits from doing so. A
39. At any point to the left of c*, there is still a benefit to be gained by adding internal
controls, because the marginal benefit of an additional control exceeds the marginal cost.
At any point to the right, the marginal cost of each control exceeds the marginal benefit.
13. Arnold ITP M.doc 6/17/2009 1:10 PM
Summer 2009] Give Smaller Companies a Choice 13
more serious concern arises where regulations, like mandatory Sec-
tion 404 compliance, force a company to overproduce internal
controls, but do not allow for a self-correction because they are
mandatory.
Figure 2
MC
$
Level of
Internal Controls
c
MB
MB
1
2
Figure 2 illustrates the inefficiency of mandatory Section 404
compliance. The graph depicts two companies with the same mar-
ginal cost curve for internal controls, but different marginal
benefit curves. The level of internal controls required by Section
404 is denoted by “c.” One of these companies, represented by
MB1
, benefits greatly from internal controls. This company maxi-
mizes its benefits with internal controls exceeding those required
by Section 404, and it will implement controls at that level. The
other company, represented by MB2
, benefits much less from in-
ternal controls. This company’s optimal level of internal controls is
less than what is required by Section 404. The problem for this
second company is that, unlike the first company, it cannot choose
to implement controls at its natural equilibrium. The result is that
Section 404 forces the second company to overinvest in internal
controls. The same dynamic could also occur for two companies
with different marginal cost curves. Because different companies
have different costs and benefits associated with internal controls,
mandatory compliance forces some companies to overinvest in in-
ternal controls, resulting in inefficient deadweight loss.
Since the optimal level of controls is different for each company,
the SEC should create rules allowing each company to adopt a
level of internal controls suited to their individual situation. In
other words, under optional compliance each company will natu-
rally tend to adopt internal controls at the economically optimal
level.
14. Arnold ITP M.doc 6/17/2009 1:10 PM
14 University of Michigan Journal of Law Reform [Vol. 42:4
Optional compliance for individual companies is desirable re-
gardless of how Section 404 compliance actually affects aggregate
share prices. The aggregate effect of Sarbanes-Oxley on share
prices is an open empirical question. Some studies suggest that
compliance has an overall positive effect on U.S. public share
prices;40
others suggest the opposite conclusion.41
While we are
short of a final answer, either conclusion supports the economic
allure of an opt-out system. This is because the cost-benefit compli-
ance decision is unique for each company,42
bandit is difficult for
an outsider like the SEC to determine where that optimal level of
internal controls lies. Thus, optional compliance is desirable be-
cause it allows companies who are best able to assess the marginal
costs and benefits of compliance to do so. Even if the overall effect
of Section 404 compliance is downward pressure on share prices,
some individual companies will still enjoy a share price increase.
These companies will choose to comply.
B. Internalizing Compliance
Mandatory Section 404 compliance is not appropriate for small
public companies. Mandatory rules are more efficient than op-
tional rules only when an actor does not internalize the costs or
benefits of its behavior and transaction costs preclude the parties
from negotiating a resolution.43
A well-structured mandatory rule
forces an actor to take a more socially desirable action than would
otherwise be in their private interest. Optional rules, on the other
hand, are preferred when an actor internalizes the consequences
of its actions. When consequences are fully internalized, a com-
40. See David Reilly, Checks on Internal Controls Pay Off, Wall St. J., May 8, 2006, at C3.
41. See Peter Iliev, The Effect of the Sarbanes-Oxley Act (Section 404) on Audit Fees, Accruals
and Stock Returns 27 (Brown Univ. Working Paper, 2007), available at http://www.econ.
brown.edu/econ/events/SoxA.pdf (finding evidence that small firms that filed Section 404
management reports had lower share prices). Other research has examined the empirical
effect of Sarbanes-Oxley compliance on cross-listed foreign companies. Kate Litvak, Sarbanes-
Oxley and the Cross-Listing, 105 Mich. L. Rev. 1857, 1876–79, 1882 (2007) (finding evidence
that compliance has had a net negative effect on the share prices of cross-listed foreign
companies).
42. See Haidan Li, Morton P.K. Pincus & Sonja O. Rego, Market Reaction to Events Sur-
rounding the Sarbanes-Oxley Act of 2002 and Earnings Management, 51 J.L. & Econ. 111, 125–28
(2008) (finding evidence that compliance has had a stronger positive share price effect on
companies previously engaged in greater levels of earnings management); Litvak, supra note
41 at 1897–98 (finding that evidence is consistent with the view that investors expected Sar-
banes-Oxley to have greater costs than benefits, especially for smaller and already well-
governed firms).
43. See generally Jeffrey N. Gordon, The Mandatory Structure of Corporate Law, 89 Colum.
L. Rev. 1549 (1989).
15. Arnold ITP M.doc 6/17/2009 1:10 PM
Summer 2009] Give Smaller Companies a Choice 15
pany’s self-interested choice whether to follow the optional rule
will correlate with overall shareholder welfare. Before giving com-
panies the choice about whether to comply, then, it is fair to ask
whether is the company’s decision has some costs externalized or
some benefits not internalized. Even if such market distortions ex-
ist, it is fair to ask whether they outweigh the economic benefits of
optional compliance, such that a mandatory rule would better
serve shareholder interests.
The tradeoff between creating mandatory and optional rules of
compliance can be described in terms of the relative benefits and
costs of compliance. The total shareholder benefit of internal con-
trols (“TB”) is a function of the level of internal controls. As the
level of internal controls increases, total shareholder benefits in-
crease. Similarly, the total cost of internal controls (“TC”) is also an
increasing function of the level of internal controls. Economic
theory tells us that the difference between the sum of benefits and
the costs will be maximized at the point where MB equals MC, and
thus that represents the optimal level of internal controls that the
company will adopt. However, the concern is that without any
other incentives, managers and shareholders of a company may
have different TB curves for internal controls, such that a manager
maximizes his net benefits at C1
(where MB1
intersects MC), while
shareholders’ optimal level of internal controls is at C2
(where MB2
intersects MC). Figure 3 illustrates this idea, with marginal benefit
and cost represented as tangent lines to total benefit and cost. The
fact that C2
> C1
indicates that there is an agency problem.
Figure 3
$
Level of
Internal Controls
TB
1
TB2
TC
C1
C2
The structure of the shareholder-management relationship par-
tially alleviates this concern. We might worry that management is
16. Arnold ITP M.doc 6/17/2009 1:10 PM
16 University of Michigan Journal of Law Reform [Vol. 42:4
reluctant to adopt stringent internal controls voluntarily because
these controls impose costs on management, while benefits accrue
primarily to the shareholders. For shareholders, however, this is
not a large concern. Shareholders have direct ownership of the
company, and management’s compensation is typically tied to the
company’s financial performance.44
Because of their direct owner-
ship, shareholders internalize both the benefits of internal controls
and the costs of fraud. Acting through the board of directors,
shareholders will reward managers for implementing internal con-
trols when the benefits to the shareholders outweigh the costs.
That is the carrot. But shareholders also carry a stick: not only can
they reward managers who increase the value of the company by
adopting efficient controls, but they can also fire managers who do
not. Additionally, shareholders are in a relatively strong position to
reign in management through the proxy process and their board
of directors to reduce any residual agency costs.
This is not to say that no transaction costs exist, or that share-
holders are always able to quickly and easily remove non-compliant
managers. Removing entrenched management can be a difficult
battle, especially in companies without a dominant or controlling
shareholder. The argument is only that shareholders do exert sig-
nificant control over managers and they will use it to align
management interests with their own. Put differently, it is too op-
timistic to think that the carrot and the stick mechanisms will
create enough pressures for C1
to equal C2
. More realistically, the
carrot and the stick will put pressure on managers such that the
gap between C1
and C2
is minimal, especially in smaller companies.
It is unlikely that the costs of this gap will outweigh the other eco-
nomic benefits of optional compliance.
C. Incomplete Information and the Private Market for Internal Controls
Auditor certification, as required by Section 404(b),
45
solves a
problem of incomplete market information. Internal controls are
complicated. Learning about and making sense of a company’s
44. See, e.g., The Conference Bd. Comm’n on Pub. Trust and Private Enter., Find-
ings and Recommendations 6 n.3 (2003) (on file with the University of Michigan Journal
of Law Reform), available at http://www.conference-board.org/pdf_free/SR-03-04.pdf
(“S&P data show that 79 percent of the increase in median CEO compensation from 1992 to
2000 was due to growth in long-term incentives, primarily stock options. In 1992 options
were 27 percent of median CEO compensation, whereas by 2000 options were 60 percent of
median CEO compensation.”).
45. The company’s auditor “shall attest to . . . the assessment made by manage-
ment . . . .” Sarbanes-Oxley Act of 2002 § 404(b), 15 U.S.C. § 7262(b) (2002).
17. Arnold ITP M.doc 6/17/2009 1:10 PM
Summer 2009] Give Smaller Companies a Choice 17
controls is time-consuming and expensive. Thus the market often
has incomplete information because investors cannot understand a
company’s internal controls without expending great resources.
Consequently, the market cannot effectively price Section 404
compliance on its own. However, auditor certification adds value to
the market because it serves as shorthand that internal controls are
“good enough,” signaling that they meet at least a minimum stan-
dard. It relieves the investors’ burden of uncovering this
information on their own, and it standardizes accounting in terms
with which investors are familiar.46
Some free market-minded thinkers may ask why the SEC should
be involved in certification at all. They might suggest that certifica-
tion is superfluous: if the market values standardized markers of
compliance, they would arise on their own—perhaps with private
enterprises rating the quality of a company’s internal controls.47
This argument is fallacious, despite the initial appeal of its logic,
because it assumes that information about companies’ internal
controls is readily available, or at least that a private individual’s
effort to uncover and disseminate this information is just as effec-
tive as a public effort. This assumption is incorrect. Internal
control accounting is complex and ambiguous, making it difficult
to analyze, let alone price. Obtaining accounting data takes time
and effort. The effort is inefficiently duplicated when multiple in-
vestors spend time independently uncovering the same
information. Without expending individual resources to obtain
and analyze this information, an investor will have incomplete in-
formation. An investor will not be willing to expend such resources
if the value of the information is low relative to the costs of obtain-
ing it. Certification is a signal to the market that ameliorates this
information deficiency without promoting wasteful and duplicative
46. Some authors argue that standardized terms add economic value. See, e.g., Frank
Easterbrook & Daniel Fischel, Mandatory Disclosure and the Protection of Investors, 70 Va. L. Rev.
669, 680–85 (1984); Marcel Kahan & Michael Klausner, Standardization and Innovation in
Corporate Contracting (or “The Economics of Boilerplate”), 83 Va. L. Rev. 713, 719–29 (1997). For
a general debate on the value of company choice in securities regulation, compare Merritt
B. Fox, The Issuer Choice Debate, 2 Theoretical Inquiries in L. 563 (2001) with Roberta
Romano, The Need for Competition in International Securities Regulation, 2 Theoretical Inquir-
ies in L. 387 (2001).
47. Bond-rating agencies may provide an approximate illustration of private internal
controls ratings. However, it is a mistake to draw too close a comparison. Bond issuers them-
selves pay for the bond-rating agency’s service. It is not clear that the same structural reasons
exist for internal controls (public companies must have their bonds rated in order to sell
them into the bond markets). Moreover, bond-rating agencies rely heavily on public infor-
mation in calculating ratings; in sharp contrast, far less public information is available with
regard to companies’ internal controls.
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18 University of Michigan Journal of Law Reform [Vol. 42:4
private efforts. When internal control standards are publically cer-
tified, it lowers the information gathering costs for all investors.
Not only does the imperfect information about internal controls
suggest SEC regulation is needed, but also asking the question
about what prevented a private market from arising reveals the
need for regulation of some companies. If standardized markers of
good internal controls have market value, why did they not arise
before Sarbanes-Oxley? One answer might be to simply deny the
presumption that internal controls add any value to any compa-
nies. This stubborn tack is not in line with the evidence.48
Another
answer might be to blame agency costs as the culprit, suggesting
that management has perverse incentives to obstruct internal ac-
counting reforms. This explanation is also unsatisfactory for the
same reasons described in Part II.B related to how shareholders
exert influence over management to encourage the adoption of
internal controls. The third answer is that for some companies, the
benefits of Section 404-type internal controls outweigh the costs,
but market failures such as the availability of internal company in-
formation and the costs of private investigation, prevent this type
of private market from arising on its own.49
Moreover, and perhaps
most importantly, even if we assume arguendo that private systems
of Section 404-like internal controls should have arisen on their
own if the costs of creating such systems outweigh the total benefits
companies choosing to comply would receive, the SEC simply does
not have the authority to abolish the statute. Even if Section 404
were overall a bad policy, given the legal and political realities of
this issue, optional compliance is the best approach for the SEC to
adopt within its authority.
Companies’ choices about whether to comply with Section 404
become more nuanced when we consider the signaling benefit of
certification. As mentioned above, auditor certification adds value
by curing an information deficiency and signaling to the market
48. See, e.g., Li et al., supra note 42.
49. There is an interesting fourth possibility—that although a system of internal con-
trols was prohibitively expensive to create privately before Sarbanes-Oxley was enacted, it
could now arise on its own if Sarbanes-Oxley was abandoned. The current system of Section
404 controls could serve as an effective research subsidy to private parties enacting a system
of certified control. The current Section 404 controls were created at great expense by the
SEC and PCAOB. It required a large investment of time and taxpayer money to create them.
If Sarbanes-Oxley was abandoned, private parties could simply copy the controls the gov-
ernment has laboriously drafted. Also, we could arguably expect more parties to be
interested in such internal controls now, as many have already paid the high initial fixed cost
of implementing compliance, and would now only face the lesser variable cost of maintain-
ing it. As such, it is at least conceptually possible that if Section 404 were repealed, private
agencies could arise where they would not have arisen had Section 404 never been enacted.
This remains a titillating possibility, but is not explored further in this Note.
19. Arnold ITP M.doc 6/17/2009 1:10 PM
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that the company’s controls meet a certain minimum standard.
The result is that a company’s marginal benefit (MB) jumps when
it crosses the threshold of compliance; at the level of internal con-
trols required for auditor certification, a momentary spike in the
marginal benefit curve occurs as the market values the standard-
ized signal. Figure 4 represents this jump.
Figure 4
MC
$
Level of
Internal Controls
c
MB w/ jump
Figure 5 traces the same concept using total cost and benefit
curves.
Figure 5
$
Level of
Internal Controls
TC
c
TB
Certifying compliance will thus encourage additional internal
controls because it confers two benefits to companies for increasing
20. Arnold ITP M.doc 6/17/2009 1:10 PM
20 University of Michigan Journal of Law Reform [Vol. 42:4
internal controls. First, each incremental additional control benefits
the company by reducing errors and fraud. Second, once the in-
cremental controls cross the threshold of certification, the
company gains a one-time boost that comes from a signal to the
market that their controls meet a minimum threshold. Because of
this one-time jump in marginal benefit, some companies will pro-
duce internal controls that exceed their natural equilibrium in the
absence of regulations and auditor certification. Whether a com-
pany will cross this threshold depends on the difference between
the additional benefit of the jump and the additional costs of creat-
ing internal controls to reach the threshold of compliance.50
If the
jump in benefit is greater than the additional costs, then the com-
pany will choose compliance and create internal controls exceeding
those that it might otherwise adopt in an unregulated state.
Finally, note that certification only creates signaling value for
companies that comply with Section 404. For companies that
choose not to comply, investors will still face information deficien-
cies and will need to expend resources to obtain and analyze this
information. Thus, even though Section 404 compliance should be
optional because it is more economically efficient, perhaps the
SEC should consider a lesser level of mandatory internal controls
disclosure, which may be a beneficial alternative for companies
that opt out.
D. Opting Out
On balance, an opt-out regime is preferable to an opt-in regime
for Section 404 compliance. Opt-out rules can create a certain
“stickiness” that aligns corporate norms with policy objectives. This
stickiness can be made more adhesive by requiring the board to
50. A unique aspect of auditor certification is that it is not a graduated benefit, but a
one-time gain. Certification is a binary signal to the market—it offers no benefit before the
company certifies, but it offers its full benefit after the company certifies. A company gradu-
ally accrues the benefits of additional internal controls that prevent internal fraud and
receives an additional benefit when internal controls reach the point that satisfies auditor
certification. However, a market will not be perfectly efficient when marginal costs and mar-
ginal benefits are not able to align. In other words, opportunities for inefficiency exist where
the shareholders would be willing to pay a higher share price for some improvement in in-
ternal controls, so long as that improvement could be certified. A shareholder would want
this incremental certification even if it fell short of full Section 404 compliance. Thus, a true
welfare-maximizing system would offer graduated benefits for graduated levels of certified
compliance; a small improvement in internal controls would be accompanied by a propor-
tional recognition by the SEC, and thereby a small benefit to the company in the market for
its shares would follow. While this graduated approach works in this simple analysis, the
transaction costs of actually implementing it would be high.
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solicit shareholder approval before the company can opt out. This
stickiness may counteract some residual agency costs when man-
agement assumes the hassle and risk of compliance. Thus if the
objective is to maximize the number of companies complying, than
an opt-out system is preferable.
There are also several arguments in favor of an opt-in system. An
opt-in system is also less paternalistic, allowing the individual com-
pany and its shareholders to determine the appropriate time to
participate. At least initially, a large number of smaller public com-
panies may choose not to set up internal controls.51
If so, then an
opt-in system might better align the presumptions of the law with
the realities of compliance, and thereby reduce transaction costs.
Thus, reasonable arguments exist for either an opt-in or an opt-out
system of compliance. Given the balance of these interests and the
current political realities, this Note argues for an opt-out system.
Nothing in this argument, however, is inconsistent with establish-
ing an opt-in system instead.
E. Smaller Companies
Optional compliance should be available only to smaller public
companies. We should pause to ask whether to extend optional
compliance to all companies—large and small—or whether it
should be available only to smaller companies. At first glance it
seems that the full force of the economic argument above supports
optional compliance for all companies. Also, there is evidence that if
only smaller companies are exempted, it will encourage them to stay
inefficiently small, thus suggesting that perhaps large companies
should be exempted as well.52
These are forceful observations, but
there are important distinctions here between large and small public
companies. First, Congress passed Sarbanes-Oxley in the wake of
some of the largest corporate scandals in recent history, with the
purpose and intent of reigning in abuses at the country’s largest
public companies.
53
Second, the public is likely to expect regulators
to be particularly vigilant about control of the largest companies.
Third, an opt-out system makes sense when the market segment be-
51. Roberta Romano favors opt-ins over opt-outs for Sarbanes-Oxley generally, as she
doubts that most companies would adopt many of Sarbanes-Oxley’s provisions at all.
Romano, supra note 2, at 1596.
52. Feng Gao, Joanna Shuang Wu & Jerold L. Zimmerman, Unintended Consequences of
Scaling Securities Regulation: Evidence from the Sarbanes-Oxley Act (Simon Sch. Working Paper
Series, Paper No. 07-07, 2007), available at http://ssrn.com/abstract=1014054.
53. See infra Part III.B.
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22 University of Michigan Journal of Law Reform [Vol. 42:4
ing regulated is highly variable in its reaction to the rule. Optional
compliance has the most appeal when individual companies have
widely varying compliance costs and benefits, and are able to make
individual decisions that maximize the value of their particular situa-
tion. Smaller public companies are more highly variable in their
reaction to Section 404 than are their larger brethren. As such, op-
tional compliance is most appropriate for smaller companies.
III. Statutory Considerations
Not only is optional compliance for smaller companies good
policy, but also the SEC has the legal authority to create it. Part III
argues that this exemptive authority stems from the text and legis-
lative intent of Sarbanes-Oxley. As explained in Part III.A, the text
of Sarbanes-Oxley, read in combination with the Securities Ex-
change Act of 1934 (“Exchange Act”), gives the SEC exemptive
authority for Section 404. Part III.B looks at the intent of Congress
in enacting Sarbanes-Oxley, and explains that Congress was con-
cerned not with smaller companies, but with large ones.
Furthermore, contrary to current realities, Congress did not intend
for Section 404 to increase companies’ auditing costs.
A. Interpreting the Statutory Text
The text and statutory structure of Section 404 authorize the
SEC to enact optional compliance. Representative Michael Oxley
and SEC Chairman Christopher Cox both suggest that the SEC has
the authority to enact a solution through its rulemaking process.
Representative Oxley told the SEC they have the authority to miti-
gate the impact of Sarbanes-Oxley on smaller public companies,
54
rebutting the argument put forth by the dissenters in the Final Re-
port.55
Oxley believes such authority comes from both Section
36(a) of the Exchange Act
56
and Section 3(a)57
of Sarbanes-Oxley,
54. Hill & McTague, supra note 13; see also William J. Holstein, Rethinking SOX: Co-
Author Mike Oxley is Creating Political Cover for the SEC to Act, Directorship, June 2006, at 17–
20 (on file with the University of Michigan Journal of Law Reform) available at
http://www.directorship.com/rethinking-sox; Letter from Representatives Michael Oxley
and Richard Baker to Christopher Cox, Chairman of the SEC (March 2, 2006) (on file with
the University of Michigan Journal of Law Reform) [hereinafter “Oxley-Baker Letter”].
55. Final Report, supra note 10, at 11127–33 (dissenting statements).
56. Securities Exchange Act of 1934 § 36(a), 48 Stat. 74 (current version at 15 U.S.C.
§ 78mm (1996)).
57. Sarbanes-Oxley Act of 2002 § 3(a), 15 U.S.C. § 7201 (2002).
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and he suggests that because Congress is not slated to revise the
legislation, the SEC should “proceed as it deems appropriate.”
58
Similarly, Chairman Cox suggests that the SEC has “ample author-
ity” to fix the problems of Section 404 without Congress enacting
any new laws.
59
A small number of detractors disagree and argue that the SEC
lacks the legal authority to enact the Final Report’s exemptive rec-
ommendations.60
In a letter written to the Advisory Committee,
Professor James Cox argued that the SEC does not have exemptive
authority under Section 404.61
He insisted that Section 404 was not
an amendment to the Exchange Act, but rather a statutory section
that stands alone.
62
He argued that Section 36(a) of the Exchange
Act did not give the SEC exemptive authority for Section 404 in the
way it does for provisions under the Exchange Act.
63
He pointed to
the language of Section 36(a) of the Exchange Act, which limits its
grant of exemptive authority only to “provisions of this title,” and
suggested that this provision refers only to Title I of the Exchange
Act.64
Had Congress intended Section 404 to be subject to the Ex-
change Act’s qualifications and exemptions, he writes, Congress
should have written it as an amendment to Section 13(b)(2).
65
His
argument concludes that Congress intended no exemption to Sec-
tion 404 because it used language that the SEC “prescribe rules
58. Hill & McTague, supra note 13, at 449.
59. Sarbanes-Oxley Audits Too Costly, Regulators Say, supra note 10. Various congressmen
have made statements about possible legislative reform. See, e.g., Rachel McTague, Unless
SEC, PCAOB Act, Miller Says, Congress will Move to Lessen § 404 Burdens, 38 Sec. Reg. & L. Rep.
635, 635 (2006) (statement of Rep. Candice Miller) (“Congress does intend to take some
action if [the SEC and PCAOB] don’t become more proactive themselves.”). Representative
Tom Feeney and Senator John DeMint introduced legislation that did not pass that would
have allowed some small public companies to opt out of Section 404. Rachel McTague,
Feeney, DeMint Introduce Bills To Exempt Smaller Firms From SOX 404, 38 Sec. Reg. & L. Rep. 902,
902 (2006).
60. E.g., Final Report, supra note 10, at 11129 (dissenting statement of Kurt Schacht)
(“[I]t is unclear to many whether the broad exemptive recommendations of the [Advisory
Committee] are even within the commission’s legal authority. Comprehensive, sweeping
exemptions from Section 404 may not be possible under the current legislation, which spe-
cifically excluded Section 404 of the Securities and Exchange Act of 1934.”); Letter from
Brainerd Currie Professor of Law James D. Cox et al. to Christopher Cox, Chairman of the
SEC (Mar. 21, 2006) (on file with the University of Michigan Journal of Law Reform) [here-
inafter Letter from Prof. James Cox to Chairman Christopher Cox], available at
http://www.sec.gov/rules/other/265-23/26523-309.pdf (“It is our opinion that section
36(a) of the Securities Exchange Act, or for that matter section 3(a) of Sarbanes-Oxley, does
not empower the SEC to exempt issuers from section 404 of Sarbanes-Oxley.”).
61. Letter from Prof. James Cox to Chairman Christopher Cox, supra note 60.
62. Id.
63. Id.
64. Id.
65. Id.
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24 University of Michigan Journal of Law Reform [Vol. 42:4
requiring each annual report” to contain assessments of internal
controls.66
Professor Cox’s argument fails because it misinterprets the struc-
ture of the statute. Section 404 of Sarbanes-Oxley is textually
incorporated into the Exchange Act, and is thereby afforded the
same exemptive possibilities as other provisions in that Act. Section
404 is necessarily intertwined with the internal reporting pre-
scribed by the Exchange Act. Before Section 404 existed, Section
13(b)(2)(B) of the Exchange Act required issuers to maintain in-
ternal controls.67
In other words, Section 13(b)(2)(B) mandated
the internal controls requirement in the first place—Section 404
merely adds the management report and auditor attestation re-
quirements. Despite Professor Cox’s assertion to the contrary,
Section 404 does not stand alone.
The in pari materia canon of construction clarifies this statutory
scheme. It applies when two statutes that were enacted at different
times pertain to the same subject.
68
Statutes in pari materia must be
interpreted in light of each other since they have a common pur-
pose. When a provision is included in one Act but omitted in
another, we incorporate the former into the latter if the purposes
of the two Acts are consistent.69
Since Section 404 and Section
13(b)(2)(B) govern the same subject matter and contain similar
language, the canon states that they must be interpreted in light of
one another.70
This concept is familiar to securities law. In Axelrod & Co. v.
Kordich, Victor & Neufeld, for example, the Second Circuit held that
the Securities Act
71
and the Exchange Act “are in pari materia and
should be construed together as one body of law.”72
In doing so,
the court relied on the similar wording of the relevant provisions
in the two Acts. It affirmed precedent, finding that the relevant
provision of the Exchange Act was “supplementary” to the similarly
worded section of the Securities Act, and that the “same logic” ap-
66. Id.
67. See Securities Exchange Act of 1934 § 13(b)(2)(B), 48 Stat. 74 (current version at
15 U.S.C. § 78m (2002)) (requiring that issuers who have securities registered pursuant to
section 12 of the Exchange Act must “devise and maintain a system of internal accounting
controls sufficient to provide reasonable assurances” regarding company transactions and
assets); Sarbanes-Oxley Act of 2002 § 404(a), 15 U.S.C. § 7262 (2002) (“The Commission
shall prescribe rules requiring each annual report required by section 13(a) or 15(d) of the
Securities Exchange Act of 1934 to contain an internal control report . . . .”).
68. 2B Sutherland Statutory Construction § 51.02 (6th ed. 2000).
69. Id.
70. Id. § 51.03.
71. Securities Act of 1933, 48 Stat. 74 (current version at 15 U.S.C. §§ 77a-aa (1998)).
72. Axelrod & Co. v. Kordich, Victor & Neufeld, 451 F.2d 838, 843 (2d Cir. 1971).
25. Arnold ITP M.doc 6/17/2009 1:10 PM
Summer 2009] Give Smaller Companies a Choice 25
plied to both statutes.73
The court concluded that reading the two
acts as one body of law “is reasonable, logical and in accord with
the intent of Congress.”
74
In another case, the Supreme Court re-
lied on the same principle to hold that “security” as defined under
the Exchange Act is interpreted in light of the Securities Act.
75
The Supreme Court has also applied the in pari materia construc-
tion to similar statutory terms in other Acts that govern securities.
In Schreiber v. Burlington Northern, Inc., the Court incorporated parts
of the Williams Act76
into the Exchange Act.77
This general view of
the securities law has led the Court to explain that “the interde-
pendence of the various sections of the securities laws is certainly a
relevant factor in any interpretation of the language Congress has
chosen.”78
This approach applies to the two related provisions at hand. Sec-
tion 404 and Section 13(b)(2)(B) contain very similar language.
This is no coincidence, as they are meant to jointly govern manage-
ment’s oversight of internal controls. Section 13(b)(2)(B) requires
each issuer to “maintain a system of internal accounting controls”
to ensure that “transactions are executed in accordance with man-
agement’s . . . authorization.”79
Adding to this, Section 404 requires
an “internal control report” that states “the responsibility of
73. Id. (quoting Moran v. Paine, Webber, Jackson & Curtis, 389 F.2d 242, 245 (3d Cir.
1968)).
74. Id.
75. Tcherepnin v. Knight, 389 U.S. 332, 335–36 (1967) (footnotes and citation omit-
ted) (“This case presents the Court with its first opportunity to construe [the definition of
‘security’ in Section 3(a)(10) of the 1934 Act]. But we do not start with a blank slate. The
Securities Act of 1933 . . . contains a definition of security virtually identical to that con-
tained in the 1934 Act. Consequently, we are aided in our task by our prior decisions which
have considered the meaning of security under the 1933 Act.”).
76. Pub. L. No. 90-439, 82 Stat. 454 (1968) (current version at 15 U.S.C. §§ 78m(d)-
(e), 78n(d)-(f) (1988)).
77. Schreiber v. Burlington N., Inc., 472 U.S. 1 (1985). The Court’s analysis noted the
language “fraudulent, deceptive or manipulative acts or practices” in section 14(e) of the
Williams Act, and explained that since Section 10(b) of the Exchange Act contained the
similar phrase “manipulative or deceptive device or contrivance,” sections 10(b) and 14(e)
were to be construed together. Id. at 5–8.
78. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 206 (1976) (quoting SEC v. Nat’l Sec.,
Inc., 393 U.S. 453, 466 (1969)); see also Lampf, Pleva, Lipkind, Prupis & Petigrow v.
Gilbertson, 501 U.S. 350, 362 (1991) (stating that limitations periods in the Securities Act
and the Exchange Act are “[e]ach . . . an integral element of a complex web of regulations
. . . intended to facilitate a central goal.”); Herman & MacLean v. Huddleston, 459 U.S. 375,
380 (1983) (stating that the Securities Act and the Exchange Act “‘constitute interrelated
components of the federal regulatory scheme governing transactions in securities.’” (quot-
ing Hochfelder, 425 U.S. at 206)).
79. Securities Exchange Act of 1934 § 13(b)(2)(B), 48 Stat. 74 (current version at 15
U.S.C. § 78m (2002))
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26 University of Michigan Journal of Law Reform [Vol. 42:4
management for establishing and maintaining an adequate inter-
nal control structure.”
80
Representative Oxley stated the argument even more broadly,
suggesting not only that we must interpret Section 404 in light of
the Exchange Act, but also that we must interpret all of Sarbanes-
Oxley this way.81
Whether Representative Oxley is correct in his
broader analysis of Sarbanes-Oxley, Section 404 clearly governs the
same matter of internal controls as Section 13(b)(2)(B). The Ex-
change Act plainly grants the SEC broad authority to exempt
internal controls under the general authority of Section 36(a),82
as
well as the narrower authority of Section 13(6).
83
Thus, just as the
SEC has exemptive authority under Section 13(b)(2)(B), so too
does it under the derivative rule of Section 404.
This construction makes sense. If the SEC has authority to ex-
empt companies from internal controls under the Exchange Act,
to lack the corresponding authority under Section 404 would be
inconsistent. If the SEC can excuse internal controls compliance,
then it must be able to excuse management’s assessment and the
auditor’s attestation of those same controls. To reason otherwise
would render meaningless the SEC’s ability to exempt companies
under Section 13(b)(2)(B). It would imply that whenever the SEC
grants a company an exemption under Section 13(b)(2)(B), the
company would enjoy a legal exemption while simultaneously vio-
80. Sarbanes-Oxley Act of 2002 § 404, 15 U.S.C. § 7262 (Supp. III 2003).
81. Oxley-Baker Letter, supra note 54 (“[T]he Exchange Act and the Sarbanes-Oxley
Act must be constructed together as they relate to the same subject matter under the legal
cannon of construction in pari materia.”).
82. Section 36(a), which grants the SEC authority to exempt companies under the Ex-
change Act, generally reads:
[Except as related to Section 15(c) of the Exchange Act,] the Commission, by rule,
regulation, or order, may conditionally or unconditionally exempt any person, secu-
rity, or transaction, or any class or classes of persons, securities, or transactions, from
any provision or provisions of this title or of any rule or regulation thereunder, to the
extent that such exemption is necessary or appropriate in the public interest, and is
consistent with the protection of investors.
15 U.S.C. § 78mm (1996).
83. Section 13(6), which grants the SEC authority to exempt companies from Section
13, reads:
The Commission, by rule, regulation, or order, consistent with the purposes of this ti-
tle, may exempt any person or class of persons or any transaction or class of
transactions, either conditionally or upon specified terms and conditions or for
stated periods, from the operation of this subsection, and the rules and regulations
thereunder.
15 U.S.C. § 78m(h)(6)(2002).
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Summer 2009] Give Smaller Companies a Choice 27
lating Section 404. Congress did not intend this odd and internally
inconsistent result.
Lastly, the SEC’s exemptive authority is buttressed by Sarbanes-
Oxley’s broad grant to that agency. Section 3(a) of Sarbanes-Oxley
grants the SEC the authority to “promulgate such rules and regula-
tions . . . as may be necessary or appropriate in the public interest
or for the protection of investors.”84
Congress likely made such a
broad grant because it recognized that the SEC is better able to
govern this technical area and that the agency might encounter
difficult and unforeseen problems in Sarbanes-Oxley’s implemen-
tation. As such, the relief of optional compliance—which best
serves the interests of investors and the public generally—is exactly
the sort of rulemaking power Congress meant the SEC to have.
B. Congressional Record
Congressional records display intent to regulate large compa-
nies, not small ones. Congress enacted Sarbanes-Oxley in response
to accounting scandals at Enron and WorldCom—two of the larg-
est companies in America. The national public concern with these
mega-scandals, and their effect in getting this “emergency legisla-
tion” rushed to cloture, is well known.
85
Accounting at smaller
companies was of little concern to Congress. As an illustration,
consider the Senators’ statements after Congress introduced the
bill. In explaining why Congress should enact these reforms, the
Senators mentioned Enron forty-six times, WorldCom thirty-two
times, Global Crossing nine times, General Motors six times, Ar-
thur Andersen six times, Xerox four times, and Tyco three times.86
In comparison, the Senators mentioned “small company,” “small
companies,” and “smallest companies,” only five times, collectively,
and even then only to point out that rules created for large com-
panies are burdensome and should apply differently to small
companies.87
The legislative history of Sarbanes-Oxley also shows that Con-
gress did not intend Section 404 to significantly raise the costs of
doing business as a public company. Language from the Senate
84. Sarbanes-Oxley Act of 2002 § 3(a), 15 U.S.C. § 7202(a) (2002); Oxley-Baker Letter,
supra note 54, at 2.
85. See Romano, supra note 2.
86. 148 Cong. Rec. S6327-47 (daily ed. July 8, 2002).
87. Id. at S6335 (statement of Sen. Gramm) (“[G]iving the board the ability to set a
principle and apply it in one way to General Motors and in another way to a small company
in a small town makes eminently good sense in practice.”).
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28 University of Michigan Journal of Law Reform [Vol. 42:4
Committee Report accompanying the floor debate makes this
clear:
In requiring the registered public accounting firm preparing
the audit report to attest to and report on management’s as-
sessment of internal controls, the Committee does not intend that
the auditor’s evaluation be the subject of a separate engage-
ment or the basis for increased charges or fees.
88
In fact, auditor attestation of Section 404 has greatly increased
auditing fees—a direct contradiction of Congress’s intent and be-
lief that the costs of compliance would be negligible. It seems then
that the implementation of Section 404 is contrary to the ex-
pressed desire of Congress. Responsibility lies with the SEC to set
Section 404 back on the path that Congress intended.
Thus, the SEC has the legal authority to create Section 404 ex-
emptions. Not only does the SEC have the requisite legal authority,
but also there are compelling reasons for the SEC to exempt
smaller public companies. The current costly implementation of
Section 404 is contrary to expressed legislative intent not to in-
crease the costs of auditing fees. Additionally, Congress passed
Sarbanes-Oxley out of concern for accounting at larger companies,
not smaller ones. For these reasons, it is both legal and appropriate
for the SEC to adopt a system of optional Section 404 compliance
for smaller public companies.
Finally, although this Note argues for optional compliance for
smaller public companies, optional compliance does not mean
smaller public companies get off scot-free. Allowing smaller com-
panies to opt out of Section 404 does not mean they will be allowed
to opt out of all internal controls regulations. A company opting
out of Section 404 will still be bound by the lesser internal controls
requirements of the Exchange Act,89
as well as state internal con-
trols laws such as Caremark in Delaware.
90
Conclusion
The SEC should adopt optional Section 404 compliance for
smaller public companies. Optional compliance eliminates the
88. S. Rep. No. 107-205, at 31 (2002) (emphases added); see also 15 U.S.C. § 7262(b)
(2002) (stating that a Section 404 audit “shall not be the subject of a separate engage-
ment”).
89. E.g., Securities Exchange Act of 1934 § 13(b)(2)(B), 15 U.S.C. § 78m (2002).
90. In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959 (Del. Ch. 1996).
29. Arnold ITP M.doc 6/17/2009 1:10 PM
Summer 2009] Give Smaller Companies a Choice 29
deadweight loss created by the current mandatory rule. Because
the market rewards compliance when the benefits outweigh the
cost, optional compliance promotes compliance in precisely the
companies for which it is most valuable. While Section 404 does
not need to be mandatory to be effective, its very existence none-
theless creates value by prescribing a uniform set of good
accounting practices by which investors can evaluate internal con-
trols. This uniform set of rules, combined with auditor attestation
of compliance, is economically valuable because it reduces the in-
formation problem in the market for internal controls. Finally, the
SEC has the legal authority to create an exemptive rule for smaller
companies, and should do so to carry out Congress’ original inten-
tions.