Friday, July 25, 2008

Whither the PCAOB? And with it, SOX?

The CFO of one of the companies I work with sent me a very interesting article published by UBS and dated June 5, 2008:

Issue Alert - Sarabnes-Oxley Act (SOX) Will Fall - Federal Appellate Court Action Expected Soon.

There is litigation in the US Court of Appeals for the District of Columbia Circuit styled Free Enterprise Fund, et al. v. PCAOB. SOX states that the Public Company Accounting Board (PCAOB) is a private-sector entity, not a governmental body. The litigation challenges the constitutionality itself of the PCAOB. If the Appeals Court finds for the plaintiff, the PCAOB will be put out of business. Even more importantly, SOX in its entirety will fall because there is no severability clause preserving portion of the Act that are not deemed unconstitutional.

The writer of the UBS alert expects the Appeals Court to find for the plaintiff. That would undoubtedly result in an appeal to the US Supreme Court. The writer expects the Supreme Court would hear the case and rule by June 2009.

Let's say the UBS alert writer is correct - the PCAOB is found unconstitutional, and then with it goes all of SOX. What would happen next? In all likelihood, Congress would come up with some kind of a replacement, and quickly. Congress is expected to stay in Democratic hands, and it is unlikely in the current economic condition that would come up with something even more difficult to deal with than what we have. More likely - they would likely ease up on some of the more onerous parts of SOX as it is today.

Let's remember that SOX was a reaction to the spectacular frauds of the first part of this decade (if anyone knows what this decade is called please let me know) - Enron and Worldcom especially. And Congress was in Republican control at the time; there is an irony to all that. Many years later, we are not going to see all of this go away, but we might find ourselves with something that is easier to live with.

No comments: