New SOX guidelines benefit small businesses: costs uncertain

The new standard for audits of public companies under section 404 of the Sarbanes Oxley Act, Accounting Standard No. 5, released by the Public Company Accounting Oversight Board (PCAOB) last month, should ease the burden of compliance for small businesses, but critics continue to press for delay in implementation. Nydia Velazquez, chair of the House Committee on Small Business, told the Securities and Exchange Commission (SEC) that a delay would "allow for the new standards to be tested and for evidence to be collected that the new standards do, in fact, lower costs for smaller firms," the Financial Times reports.

Christopher Cox, SEC chairman, said that another delay was not warranted unless the new PCAOB standard was not approved. When asked about costs at a congressional hearing, Cox said that he expected the revised standard would be "more flexible and compliance is going to be much less costly," and that he would have empirical evidence of the costs "very quickly."

"We feel at this point it's full throttle ahead to get us fully compliant by the end of the year," said Wayne Lipschitz, chief financial officer and vice president of finance for Grill Concepts Inc. a company that manages restaurants in the Los Angeles area, the Los Angeles Times reports.

Small business leaders should prepare for implementation, says Bob Kueppers, deputy CEO of Deloitte & Touche USA. They should look for additional guidance from the PCAOB this summer and for additional guidance from COSO, the Committee of the Sponsoring Organization of the Treadway Commission. "They have a project under way to see how monitoring can contribute to more efficient management assessment," Kueppers notes, according to BusinessWeek. "That should give more relief to small companies."

But implementation of SOX 404 is not the only reason small public companies are facing increased compliance costs says James Linck, associate professor of finance at Terry College of Business, University of Georgia, according to BusinessWeek in a separate report. Linck and an associate, Jeffry Netter, adjunct professor of law at Terry College of Business, recently released the results of a study they did on the impact of other auditing standards, disclosure rules and corporate governance changes required by SOX on small businesses.

While the costs of running a board have increased for all companies since 2001, Linck and Netter found that small firms paid $3.19 in directors' fees per $1,000 in net sales while large firms paid 32 cents per $1,000 in net sales. "As the costs of being public increase," Linck says, "it's likely some of these small firms will exit the public equity market. At some point the benefits of being a public company will no longer outweigh the costs."

But Linck is hopeful that SOX 404 compliance will not become too costly for most small businesses. Small businesses should benefit from the new guidelines in part because they "should signal audit firms that they are off the hook somewhat," he says. "It won't be a walk in the park, but it should be more affordable if you're looking at high-risk areas that matter, not at everything."

Most small businesses agree with the idea that companies and market benefit from the controls and reporting required by Sarbanes-Oxley, according to the Los Angeles Times. "There's no question this is a bit of a kick in the pants for people, and so there's a certain benefit to that," said Stewart Halpern, chief financial officer of San Diego-based Mad Catz Interactive, Inc., a company that designs and markets accessories for video game systems. "But at the same time there is a burden in that it's a bit far-reaching and there's also some inefficiency."

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