Another senior member of the U.S. Securities Exchange Commission has voiced his opposition to small and microcap companies getting exemptions from a number of SOX provisions. The chief accountant at the SEC said that size should not play a role in investor protection. Meanwhile, experts at the InfoWatch analytical center stress that companies should stop waiting for changes to SOX and start taking advantage of the act to manage their regulatory and legal risks.
Investors are seeing real benefits from the implementation of the Sarbanes-Oxley Act (SOX) corporate reforms, and small companies should not necessarily be exempted from the rules, says Scott Taub, the acting chief accountant at the U.S. Securities and Exchange Commission (SEC).
Speaking at a financial reporting conference in New York, Taub said that contrary to a recommendation from an SEC advisory committee that microcap and smaller companies should be exempted from certain parts of the law, SOX should be made to work for smaller companies. He said he could not conceive of a system of regulation whereby the state tells people if they invest in a small company they are going to get less investor protection per dollar invested than if they invest in a large company.
The Sarbanes-Oxley Act was passed in 2002 in response to a series of financial scandals involving companies such as Enron and Worldcom. However, since then it has been the target of criticism from corporations who say the component regulating internal controls – known as Section 404 – is so costly that it outweighs the benefits of the law.
Last month, the SEC's Advisory Committee on Smaller Public Companies voted for a proposal that would exempt some 80% of U.S. companies from certain audit requirements.
Scott Taub is sure that all companies understand the importance and necessity of internal controls, but when attention is turned to evaluating the effectiveness of those controls companies tend to think the costs outweigh the benefits. According to Taub, the number of reported ineffective internal controls over financial reporting has declined sharply in the last year. In the first year of SOX implementation, 15.8% of companies reported ineffective internal controls, but in the second year, as of March 2006, that number fell to just 6.25% of companies.
As for investors, Taub says they are perfectly happy with the effects of SOX and are “willing to pay.” In the chief accountant’s opinion, compliance with SOX can be costly, but this is no reason to provide exemptions for smaller businesses.
“SOX is expensive, but necessary. I’m sure the most far-sighted companies are making the law work in their interests, attracting more investors, improving the management of their business, safeguarding their accounting system from fraud and reducing insider risks. At the same time, there are companies who never stop lobbying the U.S. government and the SEC. I suggest that those companies that believe SOX is too expensive shouldn’t bother waiting for any changes or for the act to be relaxed. Instead, they should start learning to benefit from it and to manage their regulatory and legal risks more fully,” says Denis Zenkin, marketing director at InfoWatch.
Source: Reuters
