Thomas A. Basilo, Chairman and CEO of WithumSmith+Brown Global Assurance offers comments on SEC's SOX Hearing

"In making changes we must be cautious not to create a bigger problem."

PRINCETON, NJ, May 11, 2006 – Mr. Thomas A. Basilo, Chairman and CEO of WithumSmith+Brown Global Assurance (WS+B GA) www.wsbga.com, a full-service provider of Sarbanes-Oxley (SOX) compliance, internal audit, IT and risk assurance consulting services, reacted to yesterday’s SEC roundtable in Washington D.C. on SOX by stressing that while solutions must be found to make the costs of SOX compliance more manageable for all companies, the SEC and business community was in danger of losing focus of the origin for compliance and would be placing the nation and investors at risk by softening or delaying requirements across the board or for firms who fall under Section 404 of the SOX act.

The following are comments from Mr. Basilo:

Smaller public companies are the key to the future of the country and drive growth and employment and we support the efforts of the SEC in trying to get to the correct balance between compliance and cost. But, two critical facts must not be ignored: There is a higher incidence of fraud in smaller public companies than in larger public companies and there have been more restatements by smaller public companies than larger ones.

A factor being overlooked by the CEO’s and CFO’s of smaller public companies that are calling for massive exemptions from SOX requirements is that Sections 302 and 906 certifications will still be required.  Without auditor attestation of the effectiveness of the internal controls over financial reporting, the CEO’s and CFO’s will be the sole attesters to the effectiveness of internal control.  This could shift the financial burden for fraud from the Corporation to the individuals.  Director and officer insurance will not protect the officers as coverage will be denied under breach of warranty provisions of the policy.

Self-regulation will not work.  One of the “bones” the Advisory Committee threw to the SEC was to call for an increased threat of criminal penalties for subsequent discovery of material weaknesses not previously reported by the company. Using the statistics generated by the proxy research firm of Glass, Lewis & Co. as of May 2005, among the 366 companies that received a qualified opinion, 94 percent had previously certified their controls as effective as recently as the quarterly finding previous to the SOX 404 report.  This result is with the larger public companies that supposedly had the resources to assess their controls.  Obviously, the threat of criminal penalties has not deterred companies from improperly and inaccurately reporting on the effectiveness of their internal controls.  If the Advisory Committee recommendations are adopted, the CEO and CFO could be facing criminal charges, which, up to now, the SEC has chosen not to pursue.
Another cost area that has to be considered is litigation.  The only remedy for investors when there is no presiding law is litigation.  If any type of fraud occurs in a company, the shareholders will litigate on the grounds that the company failed to maintain an effective internal control system.  We are seeing this now as a strategy being used by lenders on defaults due to fraud.  Again the CEO and CFO will be at personal risk for these lapses as Directors and Officers Insurance will not cover fraud.

The Advisory Committee also stated that there are fundamental differences between smaller and larger companies.  This is certainly true, but when faced with the question as to whether there should be two different accounting standards under generally accepted accounting principles (“GAAP”), the Advisory Committee on Smaller Public Companies to the Financial Accounting Standards Board (“FASB”) voted no.  They said that the public would be confused and most of the smaller companies would opt for the more stringent standards to show they were not ‘small.’

Although smaller public companies represent only six percent of the capital markets (but 80% of the number of companies), investment in them is critical to the U.S. economy.  If smaller company investors lose confidence in these companies because their expectation that they have good internal controls is not met, our economy will suffer. Time is needed to assess the full impact of SOX on the economy and the investment community.  It does not make sense to make wholesale changes to the legislation before it is fully implemented by all companies. 

It should not be forgotten that the fundamental purpose of SOX was to regulate the auditors who, at the time, were its most vocal opponents.  SOX was passed overwhelmingly after the WorldCom scandal broke.  Investor confidence was low and action needed to be taken to protect the capital markets from collapsing.  No one cared, at the time, what it would cost to implement the standards.  The cost of inaction was too high. We should not place ourselves at risk again by forgetting the costly lessons learned in the wake of these scandals.”

About WithumSmith+Brown Global Assurance, LLC
WS+B GA is headquartered in Princeton, New Jersey and provides counsel and project support for Sarbanes-Oxley and other internal audit and risk assurance related services. WS+B GA offers a staff of highly-trained individuals who are subject-matter experts on a wide range of compliance, corporate governance and business process issues. The firm serves a diverse clientele ranging from public middle-market companies to pre-IPO and private equity/venture capital-backed corporations. WS+B GA offers clients innovative methodologies that are entrepreneurial in spirit resulting in a customized approach stressing hands-on, personalized service. For more information please visit www.wsbga.com