Risk & Compliance

SEC to Revisit ‘One Size Fits All’

Advisory committee would also redefine ''small company, which might help more businesses be more competitive.
Stephen TaubDecember 8, 2005

The Securities and Exchange Commission’s Advisory Committee on Smaller Public Companies is expected to make preliminary recommendations for its final report when it meets next Wednesday.

According to an agenda published on the SEC website, the committee will vote on recommendations regarding four major issues: capital formation, accounting standards, corporate governance and disclosure, and internal control over financial reporting. It will then discuss a timetable and next steps to be taken; its final report is due in April.

The committee was established by the SEC to examine the impact of Sarbanes-Oxley and other federal laws and regulations on smaller public companies. Several months ago, in a move endorsed by the committee, the SEC gave these companies another year — until July 2007 — before they must file their Section 404 internal-control reports.

Small companies are currently defined as having a market capitalization of up to $75 million, but the committee would raise that figure. Indeed, Gerald Laporte — the chief of the SEC’s Office of Small Business Policy — told Reuters this past summer that “the committee is afraid that small public companies will waste money trying to comply with things that even the accounting firms don’t yet understand.”

The committee recommended that “small company” be defined as any business in the bottom 6 percent of total market capitalization. Based on data from this past spring, Laporte reportedly added, this recommendation would raise the market-cap cutoff to $767 million.

Weighing in early, the Small Public Company Task Force of Financial Executives International fired off a press release this week expressing concern that Sarbanes-Oxley is hurting the competitiveness of smaller public companies. FEI called for “more practical solutions” for such companies while still protecting investors.

“The U.S. economy depends on smaller companies, particularly for innovation and new job creation,” said task-force chairman Richard Brounstein. “But as currently designed, the implementation of Section 404 of Sarbanes-Oxley drains the limited resources of small companies particularly hard. The efforts and recommendations of the SEC’s Advisory Committee to develop a better approach represent a worthwhile and important investment in the future of smaller public companies to ensure they are not unduly disadvantaged.”

The FEI task force pointed to data from the SEC’s Office of Economic Analysis, which found that companies with less than $700 million in market capitalization make up about 80 percent of all public companies but only 6 percent of total stock-market value.

According to an FEI survey in March, companies with annual sales between $25 million and $99 million saw their audit fees surge an average of 71 percent due to Section 404-related work; those with revenue between $100 million and $499 million, 66 percent; and the largest public companies, 47 percent.

“The regulatory requirements of 404 have taken a ‘one size fits all’ approach and amount to a barrier to the growth of smaller companies,” said Brounstein. “It would be detrimental not to pursue an effective alternative that preserves the intent and spirit of Sarbanes-Oxley while being more sensitive to smaller companies.”