The post-Enron auditor reforms are being rolled back

The US looks set to mark the 25th anniversary of the collapse of Enron by watering down regulations put in place to prevent it happening again.

The energy giant went from being one of the world's largest companies to bankruptcy in a few short months in 2001, when it became clear it had obscured its finances with dodgy accounting practices. The Sarbanes-Oxley law, passed the following year, required companies to certify they had internal controls in place to spot when staff were engaging in financial shenanigans.

The law also required most companies to get their auditor to sign off on those internal controls, providing an extra layer of protection that the Securities and Exchange Commission plans to scale back.

That requirement was immediately controversial, since it jacked up costs by adding many billable hours of work. One critic was Paul Atkins, then an SEC member and now its chair, who complained that auditors were testing tens or even hundreds of thousands of largely irrelevant procedures and systems at some companies. Successive regulatory tweaks swept away trivial requirements.

Nonetheless, Congress amended the law on several occasions, reducing the number of US public companies subject to auditor attestation of their internal controls to about half today. The SEC now plans to exempt the majority of those that are left. That will include every company with a public float of less than $2bn and some that are much bigger, since every company will be spared the requirement for their first five years after going public, even if they are SpaceX-sized behemoths.

The proposal has the goal of "making IPOs great again", Atkins says, arguing that the cost of auditor attestation is a deterrent to going public.

The 1,100 or so large caps that remain subject to the requirement account for 94 per cent of the market by value, so investors remain plenty well protected according to the SEC. Every company will still be legally required to have strong financial controls and to certify as such in their filings to shareholders.

That Sarbanes-Oxley improved the quality of financial accounting is in little doubt. The number of US public companies needing to restate their financial results fell steadily in the years after it was enacted and has stayed low, according to Ideagen Audit Analytics.

How much of the improvement is down to the requirement for management to sign off on internal controls, and how much to the added layer of protection from auditor attestation? There are notable differences between companies that are subject to the audit requirement and those that are not.