Pushed by a Congressman to stretch the deadline for small-company compliance with the Sarbanes-Oxley Act’s internal-controls provision, Treasury Secretary Henry Paulson held firm on Wednesday to the current filing date of early 2008.

While acknowledging that the burden of Sarbox 404 compliance should fall “less and less” on small companies, Paulson said: “With regard to small business, they have a need also to have good control systems.”

Testifying before the House Financial Services Committee, he said that after discussions with Public Company Accounting Oversight Board Chairman Mark Olson and Securities and Exchange Commission Chairman Christopher Cox, he was comfortable that recent rule changes by the PCAOB and SEC had adequately addressed the problems with earlier implementations of 404 and suggested that a change in the deadline wasn’t needed.

Paulson’s stance on 404 compliance at the hearing seemed to represent a subtle shift from what has heretofore seemed to be strong preference for rolling back Sarbox. Indeed, in response to a question at the hearing about what he thought were the major impediments to foreign countries listing on U.S. exchanges, he suggested that accounting changes under Sarbox were one of the key reasons for the flight of capital.

But the accounting changes are only one of a number of obstacles to competitiveness set up by the 2002 act. “When people say ‘Sarbanes- Oxley,” they are using that as code for a lot of things,” Paulson observed, noting that Sarbox-mandated changes in board structures and alterations in governance requirements by the stock exchanges were included under that code, along with the accounting changes.

Rep. Scott Garrett, a New Jersey Republican who co-sponsored a bill on the matter, had asked Paulson what he thought about providing “the small guys” with a one-year extension of the date when Sarbox 404 management reports must be filed.

With the introduction of new SEC guidance on management compliance with the internal controls provision and the PCAOB’s proposed AS5 standard advising auditors on 404 attestations likely to be approved by the SEC on July 12, members of both houses of Congress have been pushing for more breathing room for small companies. Public issuers with market capitalizations of less than $75 million must include 404 management reports starting with their 10-Ks filed on or after December 15, 2007 and auditor-attestation reports a year later.

In one exchange, Garrett reminded Paulson that although management reports would be filed in early 2008, they would be looking back to 2007, and “we are right in the middle of 2007.” The Treasury Secretary answered that he felt that under the current deadline that smaller issuers will have been given enough time for the transition.

Garrett is a cosponsor of the recently introduced “Small Business SOX Compliance Extension Act,” which would force the SEC change its rules under 404 so that that smaller companies wouldn’t have to file a management’s report on internal controls until it files an annual report for its first fiscal year ending on or after December 15, 2008. In the Senate, Senators John Kerry and Olympia Snowe recently wrote Cox
asking him to give small companies more time to prepare for complying with 404.