CFOs: Kerry's Sarbox Relief Bill Not Enough

Sen. John Kerry (D-Mass.) has introduced legislation to ease the concerns small companies have about the cost of complying with section 404 of the Sarbanes-Oxley Act. But amid Congress's month-long break until the Nov. 7 elections, followed by a year-end, lame-duck session, the bill isn't expected to go anywhere or get much attention.

None of the sources CFO.com contacted for this article — many of them small business executives — had heard of the legislation, which the former presidential candidate introduced in the Senate nearly two weeks ago. It was referred to the Committee on Small Business and Entrepreneurship.

Called the Small Business Sarbanes-Oxley Assistance Act of 2006 (S. 3919), the legislation would help companies comply with Sarbox in two ways: the Small Business Administration would award $5 million annually in federal grants to small businesses, and a task force would periodically report to Congress how to help companies comply with the 2002 law. The task force, assembled by the SBA's chief counsel for advocacy, would include Securities and Exchange representatives.

"Too many small companies don't have the resources or expertise to make the necessary structural changes on their own, and we need to make sure they compete on a level playing field," said Kerry in a statement from the Committee on Small Business and Entrepreneurship.

The bill applies only to non-accelerated filers — companies with a public float of $75 million or less — that have until the end of December 2007 to comply with the most contentious provision of Sarbox, Section 404, which requires that executives certify the adequacy of the company's internal controls over financial reporting. The most recent SEC proposal calls for non-accelerated filers to fulfill the requirement for their fiscal years ending on or after December 15, 2007.

Small-business executives CFO.com spoke with agree that while Sarbox is necessary to address transparency concerns of investors, the language needs to be tweaked to create a "level playing field" for companies of all sizes. Regulators should take another look at 404 rather than create a new, separate legislation, they say.

FlavoRx CFO Woodie Neiss believes Sarbox has the right intentions, but it's "overly burdensome" and needs to be reexamined. While Neiss credits Kerry for thinking "outside of the box" in introducing the legislation, he says it's not the best way to tackle Sarbox's problems for small companies. "In reality, changing legislation to allow for the normal progress of growth that a company goes through is more logical than throwing money at the problem," Neiss says.

Neiss's company, an $8.6 million private organization with 35 employees, has complied with Sarbox for the past couple of years so that it will be prepared for auditor scrutiny during an eventual IPO. Initially, FlavoRx used one of the Big 4 audit firms, Ernst & Young, to help with compliance and spent 14 percent of its net income during the first year. Neiss blames the expense partly on the fact that E&Y is used to working with larger companies. FlavoRx has since cut its compliance cost in half by going with a smaller audit firm.

Another private company, $50 million Analytical Graphics, has refrained from going public, partly because of Section 404's requirements, says CFO Bill Broderick. While he's glad Kerry has raised the issue through this legislation, Broderick does not think it's a solution. "I applaud Sen. Kerry for bringing this type of proposal to the table and, while I'm not for it, it continues the discussion that something has to be done," Broderick says.

Sarbox doesn't take into account that small businesses would have to create an internal audit infrastructure that many large companies already have at their disposal, Broderick says. Section 404 needs to be revisited to make it more scalable for small businesses, he adds. "The [Sarbox] legislation with respect to small businesses is pennywise but pound foolish," he says. "It takes away the market capitalization from companies perpetually hit with a million-dollar charge to their bottom line."

As the head of a company with a market cap of $120 million and nine employees, J.J. Finkelstein, president and CEO of biopharmaceutical company RegeneRx, has found that Sarbox puts a disproportionate amount of cost on smaller businesses. "Sarbanes-Oxley is very important and it was a long time coming, but as far as small companies are concerned it's overkill," he says. "I'm not convinced that one-size-fits-all is the best way. It should be structured so that the burden put on small companies is a lot less than it is for large companies."

Bob Tillman, government affairs director for lobbying group ARMA International, which specializes in managing records and information, theorizes that Kerry may have introduced the bill to get the attention of the U.S. Office of Management and Budget and highlight some of the issues raised by Sarbanes-Oxley. "This is not going to solve any problems," he says. "It's like putting an ice pack on a broken leg. Paying $25 million over five years is a drop in the bucket."

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