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Tuesday, August 14, 2012
The Public Company Accounting Oversight Board’s ten year anniversary was July 31. The PCAOB was created by the Sarbanes-Oxley Act of 2002, in the aftermath of the Enron and WorldCom accounting scandals, to "protect the interests of investors and further the public interest in the preparation of informative, fair, and independent audit reports."
Along with former Congressman Mike Oxley (R-Ohio), former U.S. Sen. Paul Sarbanes (D- Md), speaking at a Securities and Exchange Commission Historical Society event in Washington said, “All we wanted was honest record-keeping. That’s not what we were getting ... Companies were putting out financial statements that had no basis in reality.”
Many join lawmakers Sarbanes and Oxley in applauding the PCAOB’s record of vigorous enforcement, improvement in companies’ audit processes, disclosure and transparency in financial statements required by SOX 404(b).
PCAOB supporters point out that the initial cost of increased disclosure requirements has since stabilized. The recent global financial crisis has Chairman James Doty of the PCAOB and Robert Khuzami, SEC Enforcement director, coordinating their efforts to address foreign companies that violate the U.S. securities laws. The PCAOB Enforcement Transparency Act of 2011 would amend SOX to make PCAOB hearings public, thus enabling investors to be aware when companies in which they may have invested are being audited by accountants who have been charged or sanctioned by PCAOB.
However, detractors of the Act remain as insistent in their criticisms as they were at its inception, charging that Sarbanes-Oxley and its ilk are examples of frenzied, irrational behavior. They argue that:
The constitutional argument was addressed as recently as June 2010 when the U.S. Supreme Court In Free Enterprise Fund v. Public Company Accounting Oversight Board, held that the Sarbanes-Oxley Act’s provisions making PCAOB Board members removable by the SEC only for good cause were, in fact, inconsistent with the Constitution's separation of powers. As a remedy, the Court severed these provisions from the Act, making the members removable at will and thus the Board was deemed to be within constitutional requirements.
More recently enacted legislation has renewed the arguments. Supporters of Sarbanes-Oxley warn of the encroaching erosion of many of the investor protections from:
Supporters of the JOBS Act argue that loosening these investor protections will spur the economy by enabling entrepreneurs to raise new capital due to a huge increase in the pool of available investors, more opportunities to invest, less complexity and lower expenses, less burdensome, unnecessary disclosure filings-- all resulting in more start-ups and new jobs.
Commissioner Troy Paredes, speaking on his own behalf, rather than for the SEC, May 17, at an AICPA council spring meeting, was comfortable that the JOBS Act did not impair the SEC’s mission to protect investors, maintain fair, orderly and efficient markets and facilitate capital formation.
Detractors of the JOBS Act warn of the dangers of similar deregulatory belief systems, which resulted in the Gramm-Leach-Bliley Act of 1999, repealing Glass-Steagall, justified on the basis of freeing banks from onerous regulation and contributing to the next decade’s credit bubble.
Former SEC chief accountant, Lynn Turner, described the JOBS Act, as destroying safeguards dating as far back as the laws that created the SEC:
“It won’t create jobs, but it will simplify fraud … This would be better known as the bucket-shop and penny-stock fraud reauthorization act of 2012.”
Current SEC Chairwoman Mary Shapiro has also expressed concern about rolling back significant investor protections, in particular the exemption for crowd funding which would make it easier to organize online scam operations, and perpetrate fraud on naïve investors. As President Obama said when signing the legislation:
“For the first time, ordinary Americans will be able to go online and invest in entrepreneurs that they believe in.”
This raises yet another epistemological debate on the difference between belief and knowledge.
by Laura Salisbury, Legal Editor APPR
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