US authorities may ease rules despite corporate convictions, writes Denis Staunton in Washington

When Enron founder Kenneth Lay goes on trial on January 17th for his part in the energy giant's multibillion dollar fraud, he will face a tough battle to avoid growing old in jail.

During 2005, WorldCom boss Bernard Ebbers was sentenced to 25 years, Adelphia founder John Rigas got 15 years and Tyco's Dennis Kozlowski was convicted of crimes that could put him in prison for a quarter of a century.

Investment banks and auditors have repaid billions of dollars defrauded from investors and further prosecutions are on the way as financial watchdogs bare their teeth at corporate crime.

Amid all this crime and punishment however, there are signs that the Securities and Exchange Commission (SEC) is set to water down its most important anti-fraud measure since the Enron scandal - the Sarbanes-Oxley Act.

Introduced in 2002 to protect investors, shareholders and the general public from corporate fraud, Sarbanes-Oxley requires public companies to produce an annual internal control report stating "the responsibility of management for establishing and maintaining an adequate internal control structure and procedure for financial reporting, and contain an assessment, as of the end of the most recent fiscal year of the issuer, of the effectiveness of the internal control structure and procedures of the issuer for financial reporting".

Auditors are obliged to attest to and report on management's assessment of these internal controls.

Sarbanes-Oxley has proved costly for companies, with BP for instance claiming it now pays $100 million (€84 million) in accountancy fees each year.

Nobody has much sympathy for multibillion dollar giants like BP, but smaller companies are howling that the new rules are so costly and time consuming that they have become intolerable.

Paul Sharman, president of the Institute of Management Accountants, warned this month that Sarbanes-Oxley was becoming a threat to the US economy.

"The problem manifests itself in such things as:

aggregate corporate costs now in excess of $35 billion and growing each day;

diversion of senior executive focus from value adding strategic initiatives that could strengthen the US economy;

smaller and even larger businesses de-listing or threatening to de-list;

foreign investors viewing the US as having the most burdensome regulatory regime in the world.

"The price for ineffective Sarbanes-Oxley implementation, in the rapidly developing global economy, is nothing less than a massive erosion of US competitiveness," he said.

Under pressure from business groups, an SEC sub-committee has recommended exempting smaller public companies from some of Sarbanes-Oxley's most onerous obligations.

Independent accountants would continue to audit annual reports, which would be certified by the companies' chief executive and financial officers, but small companies would no longer have to produce an internal control report.

The sub-committee suggests that such reports from small companies may be unreliable in any case because managers can hoodwink auditors more easily than in large firms.

Proponents of reform argue that policing small companies heavily makes little sense because they account for less than 6 per cent of the US's total market capitalisation.

Eighty per cent of the issuers who trade on US markets have a market capitalisation of less than $750 million, however, and half have a market cap of less than $125 million.

The sub-committee concluded that, although smaller companies are more prone to fraud, the risk to investors is modest because the public is aware of the risk.

It argued that the burden of compliance was hindering "capital formation" and could damage the US economy.

However, Christopher Cox, the veteran anti-regulation Republican who became SEC chairman in August, has insisted that anti-fraud enforcement remains the watchdog's top priority.

"The guns of the SEC are not about to fall silent," he told the conference of the Securities Industry Association last month.

Mr Cox wants to simplify US accounting rules to make life easier for businesses and, he claims, make the inner workings of companies more transparent to shareholders.

"The accounting scandals that our nation and the world have now mostly weathered were made possible in part by the sheer complexity of the rules. Criminal conduct could be concealed in a thicket of detail.

"Conformity to hundreds of technical rules became not a shield to protect investors, but a sword to be wielded against them," he said.

Shareholders and the American public have reason to be sceptical about any loosening of the rules, not least because US companies are underfunding pension schemes to the tune of $450 billion, a bill that could ultimately fall to the taxpayer.

When Mr Lay's trial starts next month and the sordid story of Enron is rehashed in detail, the public may conclude that, instead of relaxing controls on companies, Mr Cox should be tightening them.