Former Enron chairman Ken Lay may just be starting his long day in court, but the Sarbanes-Oxley Act, which Enron, WorldCom, and other scandals inspired, is still under fire four years after it became law.

One lawsuit filed February 7 by the Washington, D.C.-based Free Enterprise Fund—a group represented by ex-independent counsel Kenneth Starr—challenges the constitutionality of the law mandating how listed companies govern themselves, particularly provisions on the accounting of public companies.

The fund mounted a constitutional challenge over the Public Company Accounting Oversight Board, which was created by the U.S. Congress as part of Sarbanes-Oxley. The suit claims the PCAOB violates separation of powers because its members, though not appointed by the executive branch, perform an executive function.

Company Accounting Oversight

It also says Congress violated the constitutional prohibition on delegating its legislative powers to an entity outside the legislative branch by giving the board authority to set standards regulating accounting firms and to charge public companies a fee to finance its own operations.

The suit is just one of a number of efforts to either overturn Sarbanes-Oxley or change how it is enforced. Pressure has been mounting for a year on the U.S. Securities and Exchange Commission to alter how it enforces corporate governance rules, particularly on smaller public companies—some complaints coming from within the SEC itself.

Late last month, the SEC’s Advisory Committee on Smaller Public Companies posted draft recommendations saying the SEC should exempt micro-cap companies with less than $125 million in annual revenue, and small-cap companies with less than $10 million, from the accounting provisions in the Act’s Section 404.

Size May Matter

Venture capitalists don’t like the way Sarbanes-Oxley has lengthened the IPO runway. “Taking longer to go public isn’t necessarily a bad thing,” says Mark Eastman, president of the National Venture Capital Association, “but it does cost a lot more.” And the longer it takes, the fewer the IPOs, he says.

Josh Grotstein, a partner at New York City-based SAS Investors, says stricter compliance means more distractions for executives who should be focused on building their companies. “We work at the really early stage, and it adds cost, time, and pressure for companies, which makes it unwieldy for them to get off the ground.” Mr. Grotstein complains that too much time is spent talking with lawyers, accountants, and specialty-pricing firms to work out a common-share price.

We work at the really early

Among several proposals, the advisory panel has recommended that the SEC exempt the 80 percent of public companies below a certain size from having auditors certify their internal controls.

Both former U.S. Federal Reserve Chairman Paul Volcker and former SEC Chairman Arthur Levitt dislike that idea. “In passing the Sarbanes-Oxley legislation, the Congress adopted a reasonable approach to achieve real reform, not just the appearance of reform,” they told the SEC last month. “It would be unfortunate now if the SEC and PCAOB undercut the effectiveness of congressional legislation through misguided regulatory action.”

The NVCA argues that it’s a question of what’s affordable. “We’d like to see a clean distinction between who has to be SOX-compliant, and who does not,” says Mr. Eastman. He warns that small companies can’t afford Big Four firms with the ability to make decisions that won’t land them in court.

On the heels of Mr. Eastman’s comments, headlines underscored lingering fallout from the bad old days. Four KPMG executives were hit with record fines from the SEC to settle charges related to the 1997-2000 earnings manipulation scheme at Xerox. Then there were the continuing woes of 85,000 Arthur Andersen accountants, some of whom are still looking for jobs.

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Mr. Eastman says Sarbanes-Oxley continued to consolidate auditing services into the hands of the remaining Big Four firms, putting a squeeze on smaller companies seeking their services.

“If you can’t get one of the Big Four, will investment banks still look at you the same way if you want to IPO, or will acquirers look at you the same way?” says Mr. Eastman. “That’s the fear.”