The American Spectator

p> Reform of the Sarbanes Oxley Act br> Congress has now had three years to observe how its good intentions have resulted in remarkably adverse unintended consequences. Following the Confucian principle, it needs to take responsibility for the results of its actions in the fevered political environment that fostered Sarb-Ox. It is time, learning from experience, to consider reforming the Sarbanes-Oxley Act. /p>

Here’s what Congress should be thinking about:

1. Enacting the provisions of HR 1641, introduced last year by Congressman Jeff Flake of Arizona. HR 1641 would make Section 404 of Sarbanes-Oxley voluntary, as opposed to mandatory. This approach would be well suited to a market economy and a free society.

If investors actually want the kind of heavy internal control documentation 404 demands, then the companies will do it because investors will demand it. Investors will punish those companies that opt out.

If, on the other hand, investors conclude that resources would be better spent elsewhere — on research, or introducing new products, or customer service, for example — then companies will do that and the investors will react accordingly.

2. If a totally voluntary approach is politically impossible, at a minimum making Section 404 voluntary for small public companies. Exemption from these requirements for these companies is in the process of being recommended by the SEC’s Advisory Committee on Smaller Public Companies. “Voluntary with disclosure and explanation” would be a better concept than simple “exemption” — then investors could make up their own mind.

3. Instructing the PCAOB to change its standard from “other than a remote likelihood” to “a material risk of loss or fraud.”

4. Stating clearly that Congress does not have the naive belief that accounting is something objective, but understands that it is full of more or less subjective judgments, estimates of the unknowable future, and debatable competing theories — and that therefore consultation and professional advice on the application of accounting standards is expected and demanded of accounting firms.

5. Establishing by statute a PCAOB Ombudsman, who would report directly to the Chairman, with whom companies or accountants could communicate on a confidential basis.

6. Moving PCAOB assessments, as they are for any other regulator, to the regulated entities: namely the accounting firms.

7. Instructing the PCAOB to require a Section 404 regime for the public accounting firms themselves, as a condition of their public trust, on the same standards as apply to public companies.

8. Mandating a report from the SEC and the GAO comparing the British principles-based Turnbull Guidance on corporate risk controls to the Sarb-Ox approach for large companies.

9. Bringing PCAOB under Congressional control as a regulatory agency should be, subject to appropriations, oversight and a normal appointments process.

10. Finally, enacting a sunset or reauthorization requirement for Sarb-Ox five years from now. That would be 2011, a decade after the scandals that gave it birth, with correspondingly greater experience, knowledge, and perspective for all concerned.