I was invited by the SEC to present testimony at today’s SEC Advisory Committee on Smaller Public Companies, where the topic of discussion was Sarbanes-Oxley and its effect on small companies.
The Committee met for the purpose of taking opinions on the specific guidelines regulating Sarbanes-Oxley compliance for small companies, including the issue of whether a $75 million market capitalization is the appropriate measure by which to mandate Sarbanes-Oxley compliance. Eight panelists from various backgrounds, including accounting, legal, regulatory, and investment, presented their testimony on Sarbanes-Oxley which was generally supportive of the legislation and its intent to raise the overall standards of public companies by improving reporting and control procedures.
Nevertheless, there was a consistent view that the cost of complying with the regulations, the amount of time required by internal personnel to meet compliance requirements, the complexity of compliance, and in some cases the lack of substance associated with compliance, has placed a dramatically increased burden on young, growing companies. As such, SOX is having a detrimental impact on small companies’ willingness to either become or remain a public company.
As evidence of this, small companies are increasingly pursuing merger and acquisition opportunities or even de-listing where relevant to avoid the problems associated with SOX. My testimony specifically recommended that the mechanism for triggering mandatory compliance not be based on a market capitalization of $75 million as the law currently states, but rather an annual revenue level of $75 million (not including research and development revenues), which I believe is a much more appropriate metric.
Additionally, I emphasized that a strong effort be made to jaw bone or use the bully pulpit to encourage the formation of a fifth or sixth major national auditing firm to promote the acceptability of regional firms’ auditing of public companies. As a result of SOX, auditors today put smaller companies in a defensive posture, increase their fees, and in many cases, drop smaller companies in favor of larger, better-paying companies, thus placing small companies in the vulnerable position of being dictated to by their auditors. The formation of a fifth or sixth major national auditing firm would provide small companies with a better alternative that what exists today while helping to restore the balance of negotiation between auditing firms and their clients.
It is clear to me from the presentations and the questioning today that some modification will be made to the current SOX regulations and hopefully the Committee will meet its deadline of issuing its final report by April 2006.