Committee on Capital Markets Calls for Legal, Regulatory Reform

On November 30, 2006, the Committee on Capital Markets Regulation issued its Interim Report containing recommendations for regulatory reform. The Committee is a private sector of business and academic leaders. The report refers to the committee’s general conclusion that the solution to the competitive problem of U.S. capital markets lies, on the one hand, reducing the burden of litigation and regulation and, on the other hand, increasing shareholder rights.

The Sarbanes-Oxley Act (Section 404) is one of the issues where regulatory reform is needed. The Committee does not call for amendments to the regulation. However, it calls on the Securities and Exchange Commission (SEC) and the Public Companies Accounting Oversight Board (PCAOB) to provide guidance to improve cost-benefit balance, such as revised definition of materiality, rotational testing in support of annual assessment and encourage more use of judgment. After these changes are in place, depending on the result of the updated cost-benefit assessment, Congress may need to consider if special treatment for smaller companies is necessary. However, the Committee does not support one approach that has been suggested for smaller companies to limit the scope of auditors or management’s report to “design” control. The other areas where regulatory reform is needed as identified in the report are competitiveness/”loosen capital controls”, reform the regulatory process, enforcement and shareholder rights.

IMA is performing a more careful analysis of the report and its implications for American businesses as well as management accountants. IMA’s position as noted in press releases, the global assessment guidance discussion paper submitted to the SEC on September 15, 2006 about internal controls over financial reporting and the research study performed about Sarbanes-Oxley (Section 404) implementation, strongly supports the need for risk-based, scalable management guidance that improve the cost-benefit relationship.