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SarbOx Setback


Small companies that were hoping for some regulatory relief from the most onerous provision of the Sarbanes-Oxley Act are out of luck, at least in the short term.

On Apr. 23, the 21-person Advisory Committee on Smaller Public Companies handed the U.S. Securities & Exchange Commission a list of 33 recommendations on how to make Sarb-Ox compliance easier for small public companies. The most striking proposal would have exempted the smallest from the burdensome Section 404 until the SEC can figure out a way to tailor it to them. Section 404 requires that companies complete an internal audit of controls they've already established. It's not uncommon for businesses to spend hundreds of thousands of dollars trying to comply with it.

But on May 17, SEC Chairman Christopher Cox signaled his opposition. "He and the other commissioners have indicated that they would rather make 404 work more efficiently...than [talk] about exempting smaller companies," says SEC spokesman John Heine. He adds that companies with less than $75 million of public stock outstanding have until July 15, 2007, to file their first annual report. The best they can hope for, he says, is to see the date postponed.

The idea of making 404 work more efficiently is likely to be "a very lengthy process and not an easy task," says Thomas Hartmann, a partner at Detroit law firm Foley & Lardner. He says that's partly because there is no existing regulatory framework for small companies around which to build such an approach.

Some in Congress are trying to keep the exemption idea afloat. On May 17, Representative Tom Feeney (R-Fla.) introduced a bill that would amend 404 to exempt companies with a market cap of less than $700 million. "I was disappointed by the SEC response." says Feeney. "For now it seems they have not fully appreciated the enormity of the problems with SarbOx, or they have appreciated the problems and are not ready to act aggressively to reform the implementation." Senator Jim Demint (R-S.C.) introduced a similar bill in the Senate. Even so, Feeney says the chances of his bill passing are slim while Representative Michael Oxley (R-Ohio) remains chair of the House Financial Services Committee.

The SEC committee's recommendations followed a 13-month review of the accounting and financial reporting of smaller businesses, including their audit procedures and the process of going public. The committee had recommended that companies be grouped into tiers by market size and that those with less than $787 million in market capitalization be exempted from 404. About 7,400 businesses would have qualified. That's 79% of public companies but only about 6% of the total public market capitalization. The exemption would have remained in place until a new set of internal audit rules was established specifically for smaller companies. Now it may not go into place at all.

By Jeremy Quittner


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