NVCA: Committee on Capital Markets Regulation Recommendations Fall Far Short of Meaningful Progress


Today’s interim report from the Committee on Capital Markets Regulation confirmed several of the premises that NVCA has been asserting for some time. 

First, the benefits of SOX 404 are uncertain. Second, the costs of implementing 404 have been dramatically higher than originally estimated. The Committee estimates the cost at 35 times higher. Finally, SOX 404 has been disproportionately burdensome to small companies.

Given such compelling evidence, it is surprising that the reforms suggested by the Committee did not go further to relieve the SOX 404 burden for smaller companies.  After lauding the venture industry  and its portfolio companies as being the creators of jobs and the engines of innovation the Committee’s recommendations were particularly weak when addressing smaller enterprises.

Specifically, the Committee’s recommendations are much more narrow than those of the SEC Committee on Smaller Public Companies (on which VC and smaller companies were in fact represented unlike this Committee which was comprised of accountants, big business and academics). The Committee suggests subjecting small companies to the same (revised) 404 requirements as the largest companies or asking Congress to reshape an exemption for small business thereby postponing potential relief for many, many months if not years. Lastly, the Committee’s hasty dismissal of the “design audit” proposal eliminates what could be a viable reform measure.

The footprints of the Big 4 are found throughout the report:  Auditors are not to blame for either the costs or the comlexity of implementation, but rather it is the SEC, the PCOAB and the entire legal system that is to blame. The idea that the accounting community is charging huge fees for 404 and not taking any responsibility as to decision making authority to decide what is material and what is not material is mindboggling.

The Committee’s recommendations are a step backwards when compared to what others have put forward over the past year to remedy 404. We believe the SEC fully understands the challenges associated with Sarbanes Oxley reform and is working in good faith alongside the PCOAB with a broader range of stakeholders. What could have been a productive committee has been highjacked by the accounting community which sees the status quo as the best position to be in to contnue to charge the fees they charge.