Small business concerns over Sarbanes-Oxley Act compliance resurfaced on Capitol Hill as the Securities and Exchange Commission and the Public Company Accounting Oversight Board came under new pressure to delay costly and cumbersome internal control audit requirements on small companies for at least another year.At the beginning of a new round of congressional hearings, House Small Business Committee chair Nydia M. Velázquez, D-N.Y., called on both the SEC and the PCAOB to scuttle plans to implement a freshly revised set of SOX rules.

"Before we set timeframes, we need to know that these guidelines will work," Velázquez said. "I strongly urge the SEC to delay the implementation of these regulations and to thoroughly test these guidelines to enable us to fully grasp the true impact on small businesses."

The firestorm comes just weeks after the SEC approved new SOX Section 404 guidance - designed to help companies shear unnecessary costs and redundancies over internal controls assessments - while the PCAOB voted to adopt Auditing Standard No. 5, which would replace its previous internal control auditing standard, the much-maligned Auditing Standard No. 2. It is expected that AS5 would go into effect for fiscal years ending after Nov. 15, 2007.

Testifying before the House Small Business Committee, both SEC Chairman Christopher Cox and PCAOB Chairman Mark Olson gave their agencies high marks for hammering out new rules that they said will significantly reduce the compliance burden for small companies.

But other witnesses gave the two agencies considerably lower grades for their Sarbanes-Oxley rewrites, warning that the new standards are likely to provide little, if any, relief for small businesses.

For his part, Olson predicted that the new rules would lower costs for smaller companies by providing auditors with what he called "examples of how the internal control audit process can and should be scaled to fit the relative sizes of small companies, from those that are on the cusp of accelerated filer status to those that have merely a handful of employees."

Cox was even more emphatic during his testimony, noting that, "The focus of this hearing is on whether the SEC's new guidance for management, and the PCAOB's new standard for auditors, will lower compliance costs for small companies. The answer is yes."

"We expect the unduly high costs of implementing Section 404 under the previous auditing standard will come down," he said. "They should come down, because now a company will be able to focus on the areas that present the greatest risk of material misstatements in the financials."

NOT SO FAST ...

Others who testified at the hearings were considerably less optimistic.

Harvard Law School professor Hal S. Scott, for one, told Congress that it's impossible to say whether the latest PCAOB/SEC rules will bring down Sarbanes-Oxley compliance costs for small businesses.

"Unfortunately, neither the PCAOB nor the SEC, at least based on what has been publicly released, has done any quantitative analysis of the cost reductions they expect to achieve through their new standards," said Scott. "Nor have they indicated that they would do field tests to determine achievable cost reduction before applying these revised standards to small companies."

Scott, who also serves as director of the Committee on Capital Markets Regulation, told Congress that his best guess is that audit costs for smaller companies would be reduced "only moderately" by the revised standard, "because, even after a lengthy deliberative process, the agencies have failed to give enough precise guidance as to what internal controls management and auditors should look at - that is, what is 'material.'"

On the positive side, Scott said that the PCAOB was right to move toward a "top-down, risk-based approach that allows auditors and management to make use of their judgment in tailoring their evaluations of controls to the individual circumstances of the companies they audit, so-called scalability."

However, Scott said that his committee sees a pair of serious defects in the SEC/PCAOB approach: failing to set a precise standard for materiality, and deciding to apply the new standards to small companies before doing a thorough cost-benefit analysis of how these revised standards will affect small companies.

"The question of materiality is at the heart of the SOX Section 404 problem, because auditors should only be looking at things that matter," he told Congress. "The high costs of Section 404 are in significant part due to the fact that there is no clear guidance from either the PCAOB or the SEC as to what does matter."

The PCAOB's adoption of AS5 also drew criticism from National Venture Capital Association president Mark G. Heesen. "The NVCA does not believe that refinements will result in a reduction of the overwhelming costs faced by small companies," he said.

In a stinging criticism directed at the nation's CPAs, the venture capital industry spokesman told Congress that his group's concern was centered primarily on the intentions and behavior of the accounting profession. "The PCAOB's proposal places too much power in the hands of the auditors that, in the face of both economic and liability concerns, are under tremendous pressure to take the most conservative and expensive auditing path. We're gravely concerned that the accounting profession will not change its high-cost practices, and the recent guidance provided by both the SEC and the PCAOB regarding materiality is not specific enough to compel them to do so."

U.S. Chamber of Commerce senior vice president David Hirschmann went somewhat easier on both the PCAOB and the SEC during the hearings, congratulating Cox and Olson for their "leadership, time and energy to bring balance to the system."

Nevertheless, Hirschmann acknowledged that the jury remains out on whether the board's plan for revised SOX audit rules will save small businesses any money. "We believe that we will only know if these efforts have been successful after we see how they are implemented by auditors and companies and enforced by the PCAOB," he told Congress. As a result, he said, the chamber was supporting a further delay in compliance with Section 404 for smaller public companies until the new rules and guidance have been fully tested by larger corporations.

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