A House subcommittee is digging into questions of whether federal regulation has hindered the growth of public companies and whether rollbacks are in order, including the holy grail of Sarbanes-Oxley auditing of internal controls.
Noting the decline in the number of public companies over the last 20 years by roughly half, the panel is searching for answers on the effect of federal corporate governance mandates, including the Sarbanes-Oxley Act of 2002, on a company’s decision to become or to remain public.
Rep. Bill Huizenga (R-Mich.), chair of the House subcommittee on capital markets, securities and investments, said he finds it “extremely disturbing” that the number of publicly traded companies is half what it was in the late 1990s. “The main challenges I continue to hear about are how difficult it is to go public and how difficult is is to remain public,” he said.
Tom Farley, president of the New York Stock Exchange, testified that he pins much of the blame on the audit of internal control over financial reporting under Sarbanes-Oxley. While the act itself was “put in place for a set of very good reasons,” the audit regime that has grown up around SOX has expanded the scope.
The Public Company Accounting Oversight Board, a “quasi-governmental agency” created under Sarbanes-Oxley “for 15 straight years has expanded the scope of Sarbanes-Oxley,” said Farley. The PCAOB has written, rewritten, and enforced through inspections the standards auditors must follow in their audit of internal control. The board’s inspection process has clamped down hard on audit deficiencies, increasing the work auditors have done on their public company engagements over the years to satisfy the PCAOB.
“All of this has put significant cost on companies,” said Farley. “And the benefits are not entirely clear. The data doesn’t show clearly that we’ve reduced fraud and greatly inspired confidence, but what is clear is we have far fewer public companies.”
Farley said Congress should do away with the audit of internal control for all public companies. “That’s something that exists today under the Jobs Act for emerging growth companies, and we’re suggesting let’s extend that to all companies,” he said.
In addition, Congress should “narrow the definition of internal control” under Sarbanes-Oxley to reduce the scope of the reporting requirements on public companies, Farley said. “And let’s require the PCAOB to not pass any new rules or regulations that could in any way burden public companies.”
In prepared remarks presented to the subcommittee, Tom Quaadman, executive vice president for a division of the U.S. Chamber of Commerce, said Sarbanes-Oxley began the process of putting the federal government in a bigger role over corporate governance, “intruding on the long standing precedents of state corporate law and corporate by-laws.” Quaadman also took shots at the Dodd-Frank Act, which spawned several new rules and disclosures related to compensation, among others.
Quaadman urged the panel to “strike a new balance” between federal and state systems. Congress needs to rein in the PCAOB, resolve the lingering debate over how to define materiality, simplify disclosures, and put some transparency around the proxy advisory system, he said.