Growth Strategies

Give Little Guys a Break, SEC Told

Smaller companies need more flexibility to cope with the heavy costs and compliance demands of Sarbanes-Oxley, say a number of finance executives.
Helen ShawJune 22, 2005

The Securities and Exchange Commission should consider letting more small companies take advantage of an internal-controls extension, and it should think about clearer guidelines for which controls missteps to report, executives testified at a recent SEC committee hearing.

At issue is what many see as the disproportionately large cost of regulatory compliance faced by small businesses in the wake of the Sarbanes-Oxley Act of 2002.

Speaking at a public meeting in New York of the SEC’s Advisory Committee on Smaller Public Companies, some panelists said that the commission should consider the possibility of delaying the Section 404 compliance deadline for more companies. Speakers also said the commission should think about clarifying which material events should trigger reports under that Sarbanes-Oxley provision.

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Currently, companies with a market capitalization below $75 million can take advantage of the SEC’s extension for “non-accelerated filers” and file internal control reports beginning with their first fiscal year ending on or after July 15, 2006. Companies with a higher market cap either have filed their 404 report already or will soon be required to do so.

But Neal Wolkoff, chairman and chief executive officer of the American Stock Exchange, and Alan Patricof, co-founder of $20 billion private-equity firm Apax Partners, suggested that the SEC consider another metric. “It should be company size measured by revenues, not market capitalization,” said Wolkoff, “because companies rely on revenues for prospects of their future.”

Patricof, who called the $75 million market-cap trigger level “an arbitrary measurement for compliance that causes small companies to take on burdens,” supported the idea that the SEC advisory committee should consider revenues, but also proposed a different form of overall financial regulation for small companies. “Develop a form of ‘SOX light’ for companies between $50 million and $75 million of revenues to help them prepare for full SOX compliance,” said Patricof. He would retain the Section 302 requirement that the CEO and CFO sign off on overall company financials, but Patricof also advocated “a dramatic reduction of Section 404 controls.”

Wayne Kolins, chairman of audit firm BDO Seidman and executive committee member of the AICPA’s Center for Public Company Audit Firms, recommended that the market cap which triggers compliance with Section 404 be raised to $700 million. That would capture 95 percent of U.S. equity market capitalization, according to a 2004 study by the SEC’s Office of Economic Analysis.

Regarding the trigger for materiality, Edward Knight, executive vice president and general counsel at The Nasdaq Stock Market, noted that there are no cut-and-dried guidelines of what internal-controls weaknesses should be reported. “The SEC should consider creating clear thresholds expressed in percentage of revenue or market capitalization and letting companies choose which one to use,” he told “Some have market capitalization that is substantial, but they do not have any revenue.”

“The burdens of Section 404 are not always commensurate to its benefits,” Knight added during the meeting, “especially with regard to smaller public companies.”