Growth Strategies

Sarbox Getting Costlier for Small Firms

A new survey from Merrill Lynch adds fuel to the fire for a Sarbox rollback.
Sarah JohnsonDecember 5, 2006

Costs related to the Sarbanes-Oxley Act seem to be increasing for small businesses, according to a Merrill Lynch report. In fact, 35 percent of small-business CFOs and CEOs predict Sarbox expenses to rise over the next year.

The executives are hoping a new Congress will bring them some Sarbox relief next year when the two legislators who created the 2002 law will no longer be in office. Last week’s release of the Committee on Capital Markets Regulation’s report from 22 professionals garnered plenty of headlines, and likely the attention of legislators when it blamed Sarbox for the debatable threat of increased American capital going overseas. Having no authority, but the support of Treasury secretary Henry Paulson, the committee claims that the cost burden of Sarbox’s Section 404, which requires management’s assurance of internal controls, can have a “significant” impact on a small business’s decision on whether to enter the U.S. market.

Meanwhile, in its most recent quarterly survey of smaller firms, Merrill Lynch noted that regulators are indeed paying attention to small-business executives’ angst. “We believe a transfer of business from the U.S. is the stuff that gets regulators, policymakers, and politicians interested,” the authors wrote. “A few developments in just the past few months indicate the regulatory burden upon smaller public firms as a result of Sarbanes-Oxley may be revisited by policymakers.”

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In fact, House Speaker-elect Nancy Pelosi (D-California), for example, recently said that revising Sarbox is a top priority. And the Securities and Exchange Commission is expected to issue guidance on Section 404, which requires management’s assurance of internal controls, on December 13.

More than 80 percent of small firms predict costs related to Sarbox will remain level or increase over the next year, according to the Merrill Lynch report—the number of businesses reporting increases in costs has increased over previous reports. Eleven percent of firms predict costs to rise 25 percent in the next year. In addition, more than half of the respondents rate financial and accounting regulations as more important than issues related to health insurance, worker’s compensation, licensing, patents, and pension liabilities.

The Merrill Lynch report acknowledges that Sarbox’s promotion of transparency in financial reporting benefits investors and the markets, but questions whether that goal can be achieved in a more cost-effective manner. Likewise, the study’s authors point to what some small-business owners have considered an unbalanced seesaw of burden. When energy giant Enron field for bankruptcy five years ago, the economy and markets felt the effects—and still are—but can the same be said if a small public company falters? “The question raised is whether accounting rules are properly set for all firms and should regulators worry about firms ‘too big to fail?’” the report asks. “When such behemoths fall, all parties lose.”