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Two House Democrats are planning to introduce amendments Tuesday to exempt small- and medium-sized companies from a key post-Enron reform. Consumer advocates and investor groups say that the proposed exemptions would severely undercut protection for investors and increase the chances for financial fraud.
Reps. John Adler of New Jersey and Carolyn Maloney of New York will attempt to amend the Investor Protection Act of 2009 -- a bill designed to beef up investor protection -- by adding in provisions that will undermine the Sarbanes-Oxley Act, the 2002 law designed to increase investor confidence that was enacted after accounting scandals at Enron and WorldCom rocked investors. The law was supposed to improve the accuracy, reliability, and transparency of corporate financial reporting by requiring firms to audit their financial statements and internal controls.
Adler, a member of the pro-business New Democrat Coalition, is proposing to exempt publicly-traded firms with market capitalization less than $700 million from a provision of Sarbanes-Oxley mandating an external audit of the firm.
Specifically, Adler's provision calls for "less stringent requirements" for these firms, and would require the Securities and Exchange Commission -- the federal watchdog overseeing the capital markets -- to develop rules that would ease the "burden" on these firms. But until the SEC developed those rules, firms worth less than $700 million would be completely exempt from mandated external audits.
"With the nation once again suffering the devastating effects of a financial scandal in which poor financial reporting played a significant role, investors should be able to trust that their representatives in Congress will pursue reforms that strengthen, rather than weaken, investor protections," wrote Barbara Roper, director of investor protection at the Consumer Federation of America, in a letter to Adler obtained by the Huffington Post. In addressing Adler, Roper writes, "Your...amendment fails that test."
A former high-ranking official at the SEC was even more blunt.
"What Adler is really doing is dialing for dollars," said Lynn E. Turner, chief accountant for the SEC from 1998 to 2001. "He's got a job that he wants to keep, and he has to run for that job every two years. So this is probably a strong indication that Adler couldn't care less about investors, and cares much more about getting the money so he can keep his job."
The U.S. Chamber of Commerce has been fighting for just such a reprieve for its member companies for years, arguing that one such post-Enron provision -- requiring public companies and their independent auditors to publicly disclose the effectiveness of the company's internal controls -- has been implemented in a way that creates "extraordinary and unnecessary burdens that are disproportionate to identified benefits."