By MITCH DEACON
When it comes to the Sarbanes-Oxley Act, one thing is clear: Smaller businesses will be hit by more of its provisions soon.
What’s not so clear is exactly what they’re going to be hit with.
Earlier this year the Securities and Exchange Commission launched a study of the compliance costs of the Sarbanes-Oxley Act for small public companies, or those with a public float of $75 million or less. The result of that study, expected later this month, should clarify what the smaller companies must do.
“A lot of the (small public companies) are holding their breath,” said Justin Hendrickson, a consultant for Chicago-based Grant Thornton LLP.
The Sarbanes-Oxley Act, which was passed in 2002 to head off accounting scandals in the post-Enron era, has been widely criticized by companies as cumbersome and costly. Among the most expensive tasks is Section 404, the requirement that a public company evaluate its internal controls and then in a separate procedure have external auditors sign off on them.
The SEC presumably is looking at ways to ease the regulatory burden of 404 on smaller companies. The commission has extended the deadline for smaller companies to submit their internal controls to an outside audit from the end of this fiscal year to December 2009.
When the SEC completes its study, Hendrickson anticipates more small public companies will have to contract consultants to help reduce the costs of compliance.
Indeed, Los Angeles consulting firm SOX Solutions Inc. is seeing more business than ever from midsize and small companies.
“Public companies and external auditors are still trying to figure out the best way to implement the audit standards of Sarbanes-Oxley to alleviate unnecessary audit work,” said Sonia Luna, chief executive of SOX Solutions.
Specializing in Sarbanes-Oxley compliance for small and midsize companies, Luna’s business has grown considerably since she launched the boutique consulting firm in 2004.
Many of the original Sarbanes-Oxley rules turned out to cost much more than originally projected. For example, auditing the internal controls at all branches of a business is sometimes not cost-effective, so companies are concentrating on high-risk satellite locations.
Last year, the SEC issued guidelines offering management more flexibility. The new rules are expected to help companies avoid much of the cost and confusion.
“Initially the entire auditing community was overauditing for Sarbanes-Oxley because the level of effort required to comply with the law was not clear,” Luna said.
Recent statements by SEC Chairman Christopher Cox indicate growing awareness by the commission of the law’s regulatory burden.
“The study will give us the opportunity to ensure that the investor protections of Section 404 do not impose unnecessary or disproportionate burdens on smaller companies,” Cox said in a statement.
Deacon is a staff writer for the Los Angeles Business Journal.
