Securities and Exchange Commission Chairman Christopher Cox plans to propose another year’s delay in imposing Sarbanes-Oxley Section 404 requirements for small public companies.In testimony before the House Small Business Committee in mid-December, Cox said that he thought the additional delay would allow regulators to assimilate the results of a study now underway on the costs of 404 compliance. “I intend to propose to the commission that we authorize a further one-year delay in implementation for small businesses in order to base our decision on final implementation of Section 404(b) on the best available cost data,” he said.

Results of that study are not expected to be available until mid-2008.

Cox told lawmakers that the commission would likely give smaller filers (those with market capitalizations under $75 million) the one-year delay until 2009 in which to have their internal controls assessment evaluated by an outside auditor.

Cox acknowledged that the 404 requirements on small businesses might eventually be waived entirely, but it would be up to Congress to make the legislative change.

CONGRESS APPROVES

“Today’s decision is a major victory for those small companies struggling to deal with the costs of SOX 404,” said Rep. Nydia Velazquez, D-N.Y., and chair of the House Small Business Committee. “This delay will help reduce the regulatory burden on small firms and give the SEC adequate time to more thoroughly understand its impact and to make any necessary changes.”

She had recommended that the commission study the costs of SOX 404 compliance and found, from an analysis prepared by a coalition of small business groups, that companies reported that SOX 404 compliance would represent more than 3 percent of their net income.

Senate Small Business Committee Chairman John Kerry, D-Mass., and Sen. Olympia Snowe, R-Maine, the senior Republican on the panel, each of whom lobbied for the deferral, also praised Cox’s move. “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,” Kerry said in a statement. He said that the delay will help small firms, “while still ensuring transparency and honest accounting.”

MIXED FEELINGS

Meanwhile, the Institute of Management Accountants hailed Cox’s proposal, but nevertheless expressed some reservations.

The IMA pointed out that there are still no systematic changes to create a practical implementation framework of SOX Section 404 for small businesses, so they need to rely instead on consultants and other third parties. The organization also complained that the management guidance is too vague and not truly risk-based.

In addition, the group pointed out that the one-year delay for small businesses actually creates a two-year time gap in which management is solely responsible for giving its opinion on the effectiveness of internal controls, creating potential legal liability. The IMA also has reservations about the cost-benefit survey that the commission’s Office of Economic Analysis is conducting.

The IMA helped lobby for passage in 2007 of the Small Business SOX Compliance Extension Act, as part of the Financial Services Appropriations Act for FY08. Sponsored by Rep. Scott Garrett, R-N.J., and Tom Feeney, R-Fla., the amendment extends the amount of time by one year for small businesses to comply with Section 404 reporting requirements.

Feeney also praised the SEC’s move. “By delaying this SOX requirement, we are giving our small businesses more time to ensure that they are not unfairly hurt, without jeopardizing the accountability goals of the initial SOX legislation.”

STRONG OPPOSITION

However, global firm Grant Thornton expressed sharper disagreement with Cox’s plan, saying that the proposed delay was neither warranted nor prudent. Grant Thornton pointed out that few smaller public companies have taken advantage of the SEC’s prior deferrals of the Section 404 effective date to properly prepare, so its ability to gather accurate cost statistics for smaller firms for its report will be impaired.

Grant Thornton also argued that there is evidence that Section 404 has improved the quality of financial reporting for companies that have implemented it, and that smaller companies are more prone to major internal control weaknesses, financial restatements and fraud.

The firm warned that an announcement of yet another delay would further bolster smaller public companies’ expectations that Section 404 may never apply to them, and thus reduce their willingness to invest additional effort in evaluating the effectiveness of their internal control systems.

Register or login for access to this item and much more

All Accounting Today content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access