Volume 4, Issue 2

February 2010

I. SOX 404(b) Exemption for Small Businesses “Two Steps Back”

CAQ Executive Director Cindy Fornelli, in a recent guest article for TheDeal Magazine, has voiced concern over the effort to scrap an important element of the Sarbanes-Oxley Act (SOX) – Section 404(b) – that requires smaller public companies to report on the effectiveness of their internal financial controls.

Noting that investors have consistently expressed the view that the independent audit of management’s assessment of internal controls provides significant benefits, Fornelli acknowledged that small businesses are the nation’s backbone. “But investors are its nervous system,“ she stated. “The estimated 6,000 companies that would be eligible for an exemption from Section 404(b) aren’t mom-and-pop stores. They are public companies whose stock is owned by mom and pop.”

According to Fornelli, “Weakening SOX at a time of lingering economic uncertainty may appear to be a step forward for small companies but in reality will be two steps backward for investors.”

II. Fair Value Accounting: Villain or Victim?

The Federal Reserve Bank of Boston on Jan. 31 issued a working paper which found that for most large banks it analyzed, “fair value adjustments had only a small percentage impact on regulatory capital; thus the link between fair value and capital destruction is not evident.”

The report, titled “Fair Value Accounting: Villain or Innocent Victim,” concluded, “…it would appear that fair value accounting had a minimal impact on the capital of most banks in the sample during the crisis period through the end of 2008. Capital destruction was due to deterioration in loan portfolios and was further depleted by items such as proprietary trading losses and common stock dividends. These are a result of lending practices and the actions of bank management, not accounting rules.”

The CAQ and several other stakeholder organizations continue to promote the importance of fair value accounting in determining the real worth of assets at any given point in time. As CAQ Executive Director Cindy Fornelli told the AICPA Conference on Current SEC and PCAOB Developments last December, “We have never disputed that the challenges facing financial institutions are a serious concern. But that is no reason to take aim at accounting standards, or the independence of the standard-setting process.”