The Senate Small Business and Entrepreneurship Committee is taking testimony on the effects of Sarbanes-Oxley on smaller companies. At issue is how quickly the SEC will move to make smaller public companies comply with all of the requirements of Sarbanes-Oxley.
From the International Business Times:
In testimony prepared for delivery Wednesday to the Senate Small Business and Entrepreneurship Committee, [Securities and Exchange Commission Chairman Christopher] Cox didn't rule out an additional delay in applying the internal-controls requirement to smaller companies, but said that approach isn't "Plan A" for regulators.Cox said the SEC plans to make changes in a matter of weeks, giving smaller companies plenty of preparation time. Under the current schedule, smaller companies would make their first assessment of internal controls starting this year, and have auditors weigh in starting in 2008.
Chief Counsel for the SBA Office of Advocacy Thomas M. Sullivan said in his written testimony submitted to the Committee that "There is a compelling record demonstrating that the costs of complying with Section 404 are large and disproportionately high for small public companies.... Advocacy believes that the excessive cost of Section 404 internal controls reporting may restrict a new generation of small innovative companies from seeking capital in the U.S. capital markets."
Sullivan went on to say, "Advocacy strongly recommends that the SEC continue to provide further extensions for small public companies until such time as more cost-effective procedures for internal controls can be developed." Additionally, he urged Congress to exempt smaller public companies from Section 404(b). These recommendations are consistent with a report from the SEC's own Advisory Committee on Smaller Public Companies. As the Advisory Committee has pointed out, Section 404 compliance costs in relation to revenue will be disproportionately borne by smaller companies.
But, Senator Kerry (Chair of the Committee) said the following in his opening statement:
Too many small public companies who played by the rules are now expected to deal with the time and financial burden required to comply with the Sarbanes-Oxley law. Last year, small businesses with less than $75 million in assets saw the number of financial restatements increase by 46 percent. This shows that small businesses getting ready to comply with Sarbanes-Oxley are having trouble. I believe that we will all benefit when small businesses eventually comply with Sarbanes Oxley. According to a recent United States Government Accounting Office (GAO) study requested by Senator Snowe, the cost of compliance and the time needed for small public companies to comply with Sarbanes-Oxley regulations has been disproportionately higher than for large public companies. Firms with assets of $1 billion or more spend just thirteen cents per $100 in revenue for audit fees, while small businesses are forced to spend more than a dollar per $100 in revenue to comply with the same rules.
So it seems that the most we can hope for is a little time, for Sen. Kerry clearly states that he believes that "...we will all benefit when small businesses eventually comply with Sarbanes Oxley."
However, the impact of Sarbanes-Oxley will not just be on public companies. Sarbanes-Oxley is already influencing commonly accepted standards of many private small businesses and non-profits. That means that even though these small organizations do not technically fall under this law, accountants are beginning to act as if they do in some areas of reporting. This is primarily to limit the accountant's liability in case an outside investor moves toward litigation, or in the case of a non-profit, if someone challenges the financial management by the board.
In terms of expenses related to regulatory compliance that comes from Sarbanes-Oxley, the cost of poker is about to go up for a large number of smaller organizations.
