Tuesday, February 05, 2008

SOX Study

The SEC is taking a closer look at the impact of Section 404 of the Sarbanes-Oxley Act on smaller companies. It is a cost/benefit analysis of data from the companies that are already complying with Section 404. The study will consist of a web-based survey and company interviews and is expected to be finished by next fall.

Since we already know that SOX compliance was significantly more costly than every expected for the larger companies, it seems like a fit of a no-brainer that a survey would find something similar for smaller companies. Indeed, it seems logical that SOX compliance would present an even greater financial burden for the smaller company since the standards are applied equally regardless of size.

Nonetheless, the SEC needs more than just anecdotal evidence. They need a study!

While we wait for the results, the SEC proposed to postpone yet again auditor attestation, Section 404(b), for smaller companies to fiscal years ending on or after December 15, 2009.

The SEC is again taking comments on the postponement topic. This seems a bit redundant, since we have heard over and over from all sorts of constituencies that SOX compliance for small companies is burdensome. In the past comments have homed in on two themes: 1) the high cost of SOX compliance and 2) the need to provide smaller companies with alternative standards commensurate with their operations and human resources.

I would be surprised if anything new comes up in this round. In my view, much of the brouhaha could have been avoided if there had been more detailed guidance from the SEC and/or the PCOAB on how auditors should implement SOX Section 404(b) for smaller companies. My suspicion is, that in the absence of such guidance, auditors have chosen to implement Section 404(b) with the highest standards possible in order to protect themselves from legal ramifications that come along with failed operations. This is understandable in this age of shareholder litigation. In the end, it is the individual shareholder who is not well served at all by the reform that Sarbanes-Oxley legislation promised.

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