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Rep. Michael G. Oxley has garnered both fame and blame since co-authoring the now three-year-old corporate governance initiative known as the Sarbanes-Oxley Act. On the fame side, the chief financial officer of a Midwestern company asked Oxley to autograph a pair of tube socks — a play on the Sarbanes-Oxley acronym SOX. As for the blame, Oxley acknowledged, “Nobody ever passed a perfect piece of legislation, but this one has been quite a ride.” Oxley, a Republican, spoke about his eponymous law during a wide-ranging panel discussion called “Oxley Direct” on Monday before about 120 lawyers, business and financial services executives, compliance officers and others at the InterContinental Hotel in Buckhead, Ga. The discussion was hosted by McKenna Long & Aldridge, KPMG and Computer Associates International. Oxley said that if he could change one thing about the law, he’d make it more flexible and less one-size-fits-all, especially in relation to small and mid-size public companies. Panelist Thomas Wardell, who chairs the firmwide corporate practice at McKenna Long, pointed out that the requirement that small companies comply with Section 404 — which addresses management assessment of internal controls and is widely thought to be the most expensive aspect to implement — has been postponed for a year. “Small business is saying ‘This is just too expensive; we’re dying,’” Wardell told Oxley. “I think it’s a legitimate criticism of the act and especially 404, that it’s a one-size-fits-all solution,” Oxley said. He added that the Securities and Exchange Commission has set up a small-business advisory group and has held listening sessions and roundtables. “It would be a shame,” Oxley continued, “if the law were to force these folks to go private and deny them access to capital they need to grow. … And to the extent this complicates that, we need to take a look at it.” He warned, however, that Congress rarely revisits major legislation, pointing out that it took about 70 years for the Glass-Steagall Act to come up for review. The Glass-Steagall Act, enacted in the wake of the stock market crash of 1929, separated investment and commercial banking activities. It was repealed in 1999. Oxley acknowledged that Section 404 has gone “far beyond” its intended application and said the SEC could consider more flexible implementation. Panelist Tim Bentsen, the managing partner of KPMG in Atlanta, said that beyond flexibility, the biggest challenge for smaller companies is dealing with the complex accounting requirements brought on by the act. Both he and Wardell said that while they hear lots of talk about public companies going private to avoid the strictures of Sarbanes-Oxley, they’ve seen very little action. “Capital markets represent the best, cheapest access to capital,” Wardell noted. One of McKenna’s founders, Clay C. Long, who moderated the discussion, asked if Sarbanes-Oxley was likely to move beyond best practices for private companies and become part of the standard of care companies would have to follow to avoid liability, with the attendant legal implications. Yes, said McKenna’s Wardell, noting the August decision from the Delaware Chancery Court in In re The Walt Disney Co. Derivative Legislation, No. 15452. In that case, Disney board members barely escaped liability when a judge held that they did not breach their fiduciary duty in connection with Michael Ovitz’s hiring and termination packages. That decision, Wardell said, basically meant that just because a board passes a decade-old test doesn’t mean it would pass a current one. Long pointed out that one major critique of Section 404 is its costs, raised in part by the necessity for more meetings and higher directors’ fees. A bigger piece of that cost is companies’ testing of Section 404 controls, said panelist Patrick Gnazzo, a lawyer who is the senior vice president of business practices and chief compliance officer at Computer Associates International. Because of auditor independence issues, answering questions such as how much testing should be done internally and how much externally means that a company may have all of the Big Four accounting firms on its payroll, he said. Plus, he added, before issuing opinions, those accounting firms run opinions by their executives to ensure a consistent response. “We essentially have created an oligopoly among with what I call the Final Four,” Oxley said. He added that he felt the biggest mistake resulting from Sarbanes-Oxley was “the death sentence for Arthur Andersen,” which he called “overkill.” Less competition, he said, “by definition drives up the costs.” An audience member asked, “What are the next fissures which could create cracks in the system?” His bet, the audience member said, was on hedge funds. Oxley pointed out that the SEC now requires hedge funds to register. “The bigger issue,” he said, “is how much oversight do you want?” He pointed out that it would be an enormous undertaking for the SEC to increase oversight because of lack of resources and personnel for investigation and enforcement, and that regulations implemented in such a scenario wouldn’t do much good. A reporter asked if the act ultimately could be extended to apply to nonprofits — such as universities and aid organizations. Oxley said he’d gotten numerous calls on this issue but said he has no intention of the act applying to nonprofits, adding that his co-author, Sen. Paul S. Sarbanes, D-Md., “agrees entirely.” Oxley pointed out that many nonprofits have implemented Sarbanes-Oxley as a best practices measure even though they are not required to do so. Computer Associates’ Gnazzo said that most nonprofits want corporate executives on their boards, and those executives — steeped in Sarbanes-Oxley at their public companies — begin asking more questions because they are focused on internal controls and liability. In what Oxley — a lawyer — referred to as his “closing argument” in the discussion, he said that the overall thrust of the act is self-evident: increasing and establishing penalties for violation, increasing oversight, boosting investor confidence, promoting transparency and preventing debacles such as Enron and WorldCom. “Will it happen again?” he asked. “We have laws against murder, but people get murdered every day.” Along with corporate scandals, Oxley noted that, during the past few years, the United States has suffered Sept. 11, the bursting of the technology bubble and Hurricane Katrina — and still has come through with a 5 percent unemployment rate and a healthy economy. “When you hear all the bad news,” he said, “all the whiners and bed-wetters out there, please remember what a strong system we’ve got.”

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