Sessions Joins House and Senate Colleagues

Press Release

Sessions Joins House and Senate Colleagues

U.S. Congressman Pete Sessions (R-Dallas) joined Congressman Gregory Meeks (D-NY), Congressman Tom Feeney (R-FL) and Senator Jim DeMint (R-SC) to reintroduce bipartisan legislation to lift overly burdensome corporate auditing requirements enacted in 2002 under the Sarbanes-Oxley Act.

Specifically, the legislation - entitled the Competitive and Open Markets that Protect and Enhance the Treatment of Entrepreneurs (COMPETE) Act - will reform section 404, which requires internal and external audits of corporate financial accounting controls and disproportionately affects small- and medium-sized businesses.

In the wake of corporate scandals such as the Enron and WorldCom collapses, the Sarbanes-Oxley Act - formally known as the Public Company Accounting Reform and Investor Protection Act - was passed with the goal of restoring order and trust in our nation's financial markets. Section 404 requires both internal and external audits of financial accounting controls. Publicly traded companies listed on a U.S. exchange are subject to Section 404's audit requirements.

These steep compliance costs have hit small- and medium-sized businesses particularly hard, creating the unintended consequence of encouraging more companies to delist from US exchanges, list on foreign exchanges, or otherwise look elsewhere for their equity needs rather than be forced to comply with the onerous Section 404 provision.

"While Sarbanes-Oxley was enacted to ensure accuracy and encourage greater transparency in corporate finance for the benefit of investors," Sessions said, "costly and overzealous Section 404 provisions have stifled innovation and risk and diminished America's ability to lead in the world's capital markets."

"Complying with Sections 404's requirements has turned out to be more time-consuming, more costly, and more burdensome than was ever anticipated - particularly for small- and medium-sized businesses," continued Sessions.

"The COMPETE Act will strengthen the overall goals of the Sarbanes-Oxley Act and simultaneously bring clarity to investors and the marketplace, strengthen small businesses, and increase our ability to compete globally for listing new businesses and expanding investment opportunities," Sessions concluded.

Provisions of the COMPETE Act include:

Smaller Public Company Exemption: Smaller public companies - those with market cap under $700 million or product revenue under $125 million - may voluntarily opt-out of 404 compliance.

Risk-Based Auditing: All companies that cannot or do not opt-out of 404 compliance will participate in external audits every three years after the first year of compliance. The frequency will be increased in the event of a company's merger, a significant financial restatement, evidence of fraud, or other similar events as determined by the SEC.

Material Standard for Internal Control: The SEC will develop a standard for materiality based on whether the internal control has a material affect on the company's financial statements.

Coordinated Auditing: Allow independent public accountants to rely on risk-based examinations and inspections conducted by federal or state regulatory agencies and allow prudent interaction between external auditors and internal consultants.

Auditor Competition: The SEC and the PCAOB will take steps to increase the number of qualified accounting firms, eliminate de minimis conflict of interest provisions, and provide revised, modern conflict of interest provisions.

British Accounting System Study: Mandate a report from the SEC and PCAOB comparing and contrasting the British principles-based Turnbull Guidance to implementation of Sarbanes-Oxley.

Section 404 is widely regarded as the most burdensome provision of the Sarbanes-Oxley Act. The Securities and Exchange Commission (SEC) initially estimated the costs of Section 404 compliance to be $91,000 per company, but some subsequent studies estimate that compliance costs have been 50 times that amount.

Costs have been even more burdensome for smaller and mid-size companies. "Microcap" companies (with revenues under $100 million) saw an 84% increase in outside audit fees as a result of Section 404. "Smallcap" companies (with revenues between $100 million and $700 million) saw a 92% increase in audit fees. S & P 500 companies saw an increase of 55% in audit fees.

The Wall Street Journal reported that in 2000, "nine out of every 10 dollars raised by foreign companies through new stock offerings were done in New York rather than London or Luxembourg....But by 2005, the reverse was true: Nine of every 10 dollars were raised through new company listings in London or Luxembourg..."

Congressman Sessions, Congressman Gregory Meeks (D-NY), and Congressman Tom Feeney (R-FL) introduced the OMPETE Act in the House on March 13, 2007. Senator Jim DeMint (R-SC) and Senator Mel Martinez (R-FL) introduced the bill in the Senate on March 14, 2007.

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