The U.S. Securities and Exchange Commission, under pressure to reduce costs of complying with the Sarbanes-Oxley Act, may offer guidelines to company managers in the next few weeks on corporate governance audits.
``Management and auditors clearly have different duties and responsibilities,'' SEC Chairman Christopher Cox said at a hearing today in Washington about the law's effect on companies. ``Wouldn't management benefit from having guidance from the SEC on what constitutes adequate controls?''
Cox told reporters he hoped the SEC and the Public Company Accounting Oversight Board would announce their next steps ``within the next few weeks.'' After a similar gathering last year, the SEC gave auditors guidance on how to assess a company's controls to prevent fraud and accounting errors.
Two years after the law took effect, some executives say Sarbanes-Oxley auditing costs remain too onerous, particularly for smaller firms. Regulators suggest they may be ready to rely more on company managers and modify rules to lower audit bills.
``What we hear today will give us guidance for adjusting and improving the rules,'' Bill Gradison, acting chairman of the accounting oversight board, said in opening remarks. ``It would seem that some further changes may be in order.''
The current system fosters duplication of effort by managers and accounting firms, said Joseph Grundfest, a panelist and former SEC commissioner, in an interview.
``The auditors have to be comfortable that they can legitimately rely on the work that management has done, but that doesn't mean auditors should repeat every step that management has done along the way,'' Grundfest said.
Cell Genesys Inc., a biotechnology company at work on cancer vaccines, said its Sarbanes-Oxley costs rose last year, taking money away from research.
``If you are a small company, every penny has to be put into the primary mission of the business,'' Cell Genesys Chief Executive Officer Stephen Sherwin said at the hearing. ``And for us, that's inventing new products for human health.''
The South San Francisco, California-based company spent about $5 million on administrative costs, mostly for Sarbanes-Oxley compliance, in this year's first quarter, Sherwin said. The spending rose from $3.8 million in the year-earlier period.
Other witnesses said the Sarbanes-Oxley law is working as intended, protecting investors by eliminating some of the concerns about company controls.
``There has been improvement in disclosure,'' said Dennis A. Johnson, a senior portfolio manager with the California Public Employees' Retirement System, the largest U.S. pension fund. ``Members of the audit committee are of better quality. They are far more engaged. Better planning seems to be taking place at the board level.''
Investors are loath to have companies spend millions of dollars on checks and balances aimed at transactions that are of little significance, Robert Pozen, chairman of MFS Investment Management, a Boston-based mutual fund company, said in his written testimony.
``There is no doubt that the SEC will issue guidance for small companies, but whether it is meaningful, I don't know,'' Pozen said in an interview.
Ideas about how the SEC might lower costs while still maintaining the protections of Sarbanes-Oxley are proliferating.
Regulators should cut rigid rules on internal controls and let companies and their outside accountants judge what checks are important, said Edward Nusbaum, chief executive of Chicago-based Grant Thornton LLP, the sixth-biggest accounting firm.
``What we don't want is the PCAOB and the SEC second-guessing companies and their auditors over internal controls,'' Nusbaum said in an interview.
New York Stock Exchange Chairman Marshall Carter, testifying April 26 before the House Financial Services Committee, said the SEC should change the frequency of full-scale auditor reviews from annually to once every three years.
Companies would have to review every year only those accounting and other practices ``where the risk of material misstatement would prove harmful to investors,'' Carter said.
An advisory panel to the SEC recommended on April 23 that all but the largest 20 percent of publicly traded companies be exempt from the audit provisions of Sarbanes-Oxley, ``unless and until'' the agency creates a cheaper compliance plan.