House Committee Considers Impact of New SOX Regulations on Small Business

Today, as Congress reconvened, chairmen of the Securities and Exchange Commission [SEC] and the Public Company Accounting Oversight Board [PCAOB] came before the House Small Business Committee to explain the impact of recently approved standards for complying with Section 404 of the Sarbanes-Oxley Act of 2002 [AKA SOX 404] on small public companies. Chairwoman Nydia Velázquez [D-N.Y.] reiterated her call for at least a yearlong delay in allowing time for small firms to comply.

"Before we set time frames, we need to know that these guidelines will work," Velázquez asserted. "I strongly urge the SEC to delay the implementation of these regulations, and to thoroughly test these guidelines to enable us to fully grasp the true impact on small businesses."

With concerns raised over the effect that SOX 404 will have on this nation's small businesses, Chairwoman Velázquez called for the SEC, prior to approving the new standards, to develop a "hard dollar" estimate demonstrating the costs of these regulations on small companies.

Committee members argued that more time is needed to determine whether or not these rules will actually reduce compliance costs. The requested delay would also enable small companies to train managers and auditors in best practices to ensure the regulations are implemented properly.

It was these same concerns that prompted Chairwoman Velázquez and Ranking Member Steve Chabot [R-Ohio, pictured above] to ask for additional time for small businesses to comply with SEC and PCAOB guidance in March. However, the current proposal fails to account for this original request.

"Though it has taken five years to come to these conclusions about implementing SOX 404 for small firms, we should not be too hasty in imposing these rules," said Chairwoman Velázquez. "This is not something that has been decided overnight, nor should it be thrown upon small companies overnight. The SEC needs to recognize the negative impacts that immediate implementation will have on small firms."

Though small businesses and lawmakers have rallied around the Sarbanes-Oxley Act of 2002 in an effort to prevent accounting fraud and rebuild shareholder trust in the wake of corporate scandals, some of its provisions have been applied in a way that disproportionately impacts smaller public companies.

For example, small firms would face increasing regulatory and paperwork burdens under the reporting requirements in Section 404 [SOX 404]. Many are paying a higher percentage of their revenues for legal and audit fees than their larger counterparts.

To compound the difficulties for entrepreneurs -- many of whom already operate on small margins -- a number have diverted resources from research and development to compliance, or returned to private ownership simply to avoid the regulation altogether. All of these consequences have a negative impact on competitiveness for small businesses and limits their ability to expand, and to create jobs.

"The reality here is that small businesses could be negatively impacted by these regulations," said Chairwoman Velázquez. "The writing is on the wall, and the SEC and PCAOB need to acknowledge that. Given the complexity of these regulations and the uncertainty that surrounds them, it is critical that small companies are not being rushed into implementing them."
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