Kerry, Snowe and Velázquez Praise SEC's Extension for Small-Biz Compliance With Sarbanes-Oxley Section 404

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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Senators Kerry and Snowe Call on SEC to Give Small Firms More Time, Assistance to Comply with Sarbanes-Oxley

Just one day after House Small Business Committee Chairwoman Nydia Velázquez [D-N.Y.] urged Securities and Exchange Commission [SEC] officials to extend enforcement of Section 404 of the Sarbanes-Oxley Act of 2002 [see "House Committee Considers Impact of SOX Regulations on Small Business"], two prominent U.S. Senators weighed in, too.

Earlier today, Sens. John Kerry [D-Mass.] and Olympia J. Snowe [R-Maine] outlined specific steps the SEC should take to provide more time and assistance to small public companies to comply with Sarbanes-Oxley [SOX] internal control regulations.

Kerry and Snowe, as chairman and ranking member of the Committee on Small Business and Entrepreneurship, have been closely following the impact of SOX compliance on small public companies worth less than $75 million.

“Small public companies still face higher costs than large firms and deserve more time to comply with the recent changes to Sarbanes-Oxley," Kerry declared. "The regulations issued by the SEC last month are an important step, but I, again, strongly urge the SEC to give small public companies additional time to comply with Sarbanes-Oxley and to find additional ways to reduce their regulatory burden."

Sen. Snowe agreed. “We need to give America’s small businesses the necessary time and resources needed to successfully comply with these new regulations,” she noted. “By providing the proper tools -- such as an adequate extension, a full cost assessment, and a compliance guide to institute these regulations -- our nation’s small businesses will have what they need to effectively reduce their regulatory burden.”

At a committee hearing on April 18, and in several oversight letters, Kerry and Snowe called on the SEC and Public Company Accounting Oversight Board to give smaller firms up to a year extension to comply with the law and take additional steps to reduce the burdens small businesses face. Last month, the SEC issued final rules for firms to follow in complying with Section 404 of Sarbanes-Oxley, which sets management and accounting reporting standards.

In a letter to SEC Chairman Christopher Cox [pictured above], Kerry and Snowe requested:
* A reasonable extension for small public companies to comply with the newly issued regulations;
* A full assessment of the cost of the new rules under the Regulatory Flexibility Act before they become effective later this year;
* A small-business compliance guide, to be published by the SEC, that would assist small companies in implementing the new internal controls requirements; and
* A regular report by the SEC’s Advisory Committee on Smaller Public Companies on the impact of Section 404, as well as how the financial burden of compliance with the Sarbanes-Oxley Act may be reduced.

GoodBiz113's take: We appreciate the bipartisan efforts of U.S. Senate and U.S. House small business committee leaders to promote complete understanding of SOX regulations before the SEC institutes full compliance.

For information about what your company or not-for-profit organization needs to do in order to comply with SOX, check out the resources we've provided under "Relevant Goods."
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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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