The Securities and Exchange Commission and the Public Company Accounting Oversight Board are prepared to reform the Sarbanes-Oxley Act to reduce the costs that small businesses incur when complying with section 404 and during auditing procedures. The regulatory bodies appear to have reacted to a recent study that suggests that small businesses' costs for implementing the rules are disproportionately higher than those for bigger firms. Despite the concessions, experts at InfoWatch believe it is still too early for the business lobby to celebrate a victory because in practice nothing has changed.
The head of the Securities and Exchange Commission (SEC), Christopher Cox, said that earlier this month that Sarbanes-Oxley (SOX) is a good idea, but has not always worked effectively in practice. The SEC head went on to say that his agency was open to changing the rules and making concessions to small business.
Cox said that the SEC intended to get the law right "sooner rather than later." According to him, the law has "great potential" to improve financial reporting, but "in practice, it hasn't always worked out that way."
The SEC and the Public Company Accounting Oversight Board (PCAOB) have been the target of repeated attacks by business groups for over six months. The business lobby has been particularly vocal about section 404 of SOX. Companies claim the internal control requirements stipulated in that section are too expensive for small businesses, which are forced to hire costly auditors and buy new software. That argument gained more weight earlier this month when the Government Accountability Office released a study that found small businesses’ costs for implementing the rules are disproportionately higher than bigger firms', and that more companies have gone private to avoid the law's requirements.
Bill Gradison, the acting chairman of the PCAOB, echoed the views of Christopher Cox by saying the board welcomes ideas about how to make Section 404 "scalable" to businesses of all sizes.
The announcements by the two senior officials came shortly after a report released by an SEC advisory committee recommended that small companies get breaks from the more costly requirements of SOX. Both agencies, which monitor compliance with the law, rejected such radical changes. However, maintaining such a conservative position today is becoming increasingly precarious, which is why Gradison and Cox are ready to reform the law rather than make sweeping changes.
Business representatives now expect the SEC to finally lessen the SOX burden on smaller companies. At the current time those firms with a market capitalization of less than $75 million are exempt from the internal control requirements, but they will have to comply by July 2007.
It finally appears that the business community has achieved its goal and caused the main adherents of SOX to alter their stance. The regulatory bodies and companies will now have to look for a compromise between the costs and the effectiveness of internal controls. It may mean that with time SOX will lose its status as the toughest corporate law around.
“It is still too early to reach any conclusions about the fate of small businesses within the framework of SOX, not to mention the fact that nobody is going to reform the law for medium-sized and large companies,” says Denis Zenkin, marketing director at InfoWatch.
“SOX was created to protect the interests of investors. In that respect it has been very successful. With that in mind, the strategic position of the law is still very strong. Even those companies calling for the reform of SOX concede that section 404 is both important and necessary, and are mostly complaining about the costs. So, in actual fact, very little is going to change,” adds Denis Zenkin.
Source: MarketWatch
