Making Sarbanes-oxley Work Better for Small Public Companies

In the aftermath of scandals at Enron and other companies, Congress four years ago passed the Sarbanes-Oxley Act. I voted for the law which made many improvements to corporate governance and accounting. It strengthened investor protections. It made companies more accountable. It gave law enforcement new tools to fight corporate fraud.

Section 404 of Sarbanes-Oxley also mandated that companies, both large and small, and their auditors assess the effectiveness of the companys internal accounting controls. The costs of corporate compliance with Section 404 have been substantial and are continuing. These costs have proven especially burdensome for small businesses which frequently lack the staff and resources of larger companies.

This is not merely a hypothetical concern. The disparity is demonstrable. The Government Accountability Office found that, proportionately, small public companies were spending considerably more on implementing Sarbanes-Oxley than large companies. Firms with less than $75 million in market capitalization were spending $1.14 in audit fees per $100 of revenue, the congressional researchers calculated, compared to just 13 cents per $100 of revenue for firms with greater than $1 billion in market capitalization.

I have heard from many companies, especially many small businesses, seeking relief from some of the enormous paperwork burden and tremendous costs connected with compliance.

In response, I joined many of my colleagues on the House Financial Services Committee in urging the Securities and Exchange Commission and the Public Company Accounting Oversight Board to level the playing field for small companies trying in good faith to comply with the law, often without the resources and expertise of big corporations.

We recommended that the commission and the accounting board ensure that their standards are sufficiently "user friendly" so that the smallest of public companies will be able to develop appropriate internal controls to protect investors without imposing an undue financial burden on the firms.

Because small companies face unique challenges under the law, we asked the commission to provide them and their auditors the tools they will need to achieve the investor benefits without incurring unnecessary costs.

At our urging, the regulators announced a series of steps intended to improve implementation of the act. The commission also decided to provide additional time for the smallest companies and their auditors to review and implement the new guidance for compliance with the law.

SEC Chairman Chris Cox, my former colleague who represented Orange County in Congress until 2005, has assured me that the commission is committed to finding a way to minimize burdens on smaller public companies without compromising the goal of investor protection.

œThe combination of streamlined, user-friendly guidance and adequate time for an orderly implementation will help to address many concerns of smaller companies and go a long way toward making this a more useful and cost-effective process, Chairman Cox said in his response to our letter.

The action taken so far by the SEC is just a first step. Since taking office in July, Accounting Oversight Board Chairman Mark Olson also has repeatedly stated the boards commitment œto make sure that the smaller firms and smaller companies will not have an excess burden.

I am confident that, with continued congressional vigilance and oversight of the agencies with responsibility for Sarbanes-Oxley compliance, we will demonstrate that it is possible to reduce the regulatory burden on small companies while still preserving the many benefits of the Sarbanes-Oxley Act for investors.