After nearly a year of urging from Senators John Kerry [D-Mass.] and Olympia J. Snowe [R-Maine], as well as Rep. Nydia M. Velázquez [D-N.Y.], today the U.S. Securities and Exchange Commission [SEC] agreed to provide small businesses with an additional one-year extension to comply with Sarbanes-Oxley Section 404 [b] for the country’s smallest public companies.
In the wake of major corporate scandals, the Sarbanes-Oxley Act of 2002 [H.R. 3763] was passed in an effort to prevent accounting fraud and rebuilt shareholder trust. However, some of its provisions -- most notably, Section 404 -- disproportionately impact smaller public companies.
These firms are currently facing increased regulatory and paperwork burdens, as well as higher costs from legal and auditing fees. As small companies operate on slimmer profit margins than do their larger counterparts, this represents a major expense. However, until today, the SEC had not acknowledged these added challenges.
Senate Small-Biz Committee Presses for More Time for SOX 404 Compliance
Earlier this year, Kerry and Snowe held a hearing focusing on the impact of Sarbanes-Oxley regulations on small businesses, and wrote three letters to the SEC seeking additional time for small firms to comply while preserving the intent of the 2002 law.
“It took too long and it required too much pressure, but it seems the SEC will finally provide small businesses a little extra time to comply with the Sarbanes-Oxley reforms,” said Sen. Kerry, chairman of the Committee on Small Business and Entrepreneurship. “Sen. Snowe and I strongly urged the SEC to take this action because smaller firms face higher costs to comply with Sarbanes-Oxley. This will help ease the burden on small firms and help encourage more small businesses to become public companies – while still ensuring transparency and honest accounting.”
"I commend Chairman Cox [pictured] and the Securities and Exchange Commission for implementing this delay," said Sen. Snowe, ranking member on the Committee on Small Business and Entrepreneurship. "Doing so will give these small firms time to successfully meet Sarbanes-Oxley’s requirements and enable the SEC to fully consider the economic impacts on small, publicly traded companies."
Small firms worth less than $75 million face a higher burden than larger firms in complying with the Sarbanes-Oxley regulations. In 2006, restatements of financial results for large companies decreased by 20 percent, while restatements for the smaller firms increased by 42 percent, due to the disproportionately higher cost and time needed to comply.
"Small, public firms believe in strong, internal controls," Snowe noted. "Sen. Kerry and I will continue to vigilantly work to assure that Sarbanes-Oxley promotes corporate responsibility without driving small, public companies out of the U.S. stock market."
Click on the following links to read the letters Sens. Kerry and Snowe sent on Feb. 23, May 8 and June 6.
Velázquez Voices Her Praise of SEC's SOX 404-Related Postponement
During the past year, House Small Business Committee Chairwoman Velázquez has also made repeated calls to postpone enforcement of SOX 404 regulations.
“Today’s decision is a major victory for those small companies struggling to deal with the costs of SOX 404,” said Velázquez. “This delay will help reduce the regulatory burden on small firms, and will give the SEC adequate time to more thoroughly understand its impact and to make any necessary changes.
“I have repeatedly called on the SEC to provide a hard-dollar estimate on compliance costs for small firms, but these requests – until today’s hearing – fell on deaf ears. Without solid data, we cannot truly understand the possible effects these regulations will have on small public companies and on the economy.”
At the chairwoman’s recommendation, a coalition of small-business groups stepped in and performed their own analysis. The survey found that, although SOX 404 [b] is more than a year away, 66 percent of firms have already engaged an outside auditor. This figure is a major break with the SEC’s original estimate that companies would not incur significant costs until well into 2008.
Additionally, companies reported that SOX 404 [a] compliance costs will represent more than three percent of their net income. In light of this new information, the SEC will conduct their own research as to the effects of SOX 404 compliance on small firms.
“While this delay will help ease undue burdens on small firms, it is by no means the final stage of this fight,” Velázquez noted. “I will continue to press the SEC to collect this data in a timely manner, and make certain that everything is done to ensure that SOX 404 does not undermine the competitiveness of the U.S. economy.”
SOURCES: Library of Congress, U.S. House Small Business Committee, U.S. Senate Committee on Small Business and Entrepreneurship
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