Why Donaldson Had to Go

   Section 404 of Sarbanes-Oxley was Donaldson's undoing. (See Article on resignation of Donaldson) The SEC's rules on management reports on internal controls over financial reporting in the reports of publicly held companies were issued in June of 2003 and after an extension of effective dates, finally hit in the latest round of filings.  "Accerlerated filers" had to comply by November 15, 2004 and non-accelerated filers have to comply by July 15, 2006.  Company expenditures to produce the reports and pay auditors to attest to the reports have been huge.

    Foreign companies threatened to delist in the United States, many privately held United States companies decided to stay private, and some publicly held United States companies decided to "go dark" (go private).  The American business community wondered whether compliance gains were worth the costs of the Section. 

     Error One:  The SEC did not write very good rules implementing the section.  Error Two: It did not help that Donaldson promised foreign companies some leniency under the Section.  United States companies did not appreciate the news that their foreign competitors would be treated better than United States companies.  Error Three:  The SEC on May 16 chastised auditors (and United States companies for paying their auditors) for pushing expensive, technical procedures in an effort to comply with the vague rules implementing the Section.  Error Four:  The SEC ran an unexpected budget deficit and the GAO told the SEC to get its own house in order, in essence, chiding the SEC for a lack of its own internal controls.  The business community was not amused.  Error Five:  The chairman, worried about sniper attacks in the new SEC building, incurred over a $1million in costs, changing building designs and delaying a move of his office to the new building.

    Errors Four and Five were the buzz this week and were the final straws.  It is one thing to force huge compliance costs on the entire American business community; it is another to not impose those same controls on yourself and lose control of your own budget.