Josh's Weblog

SOX and the corporate scandals have led corporate boards and executives to focus like never before on issues of proper accounting, internal controls, fraud detection and appropriate reporting of financial results.

SOX has imposed across-the-board guidelines for all publicly-traded companies so that both investors and the public have a higher confidence that companies are reporting financial results in a similar manner.

Although increased auditing fees amount to a small burden for Fortune 500 companies as a percentage of revenue, the doubling or tripling of auditor bills, accompanied by additional accounting and legal fees, can be the difference between a profit and a loss for emerging businesses. Studies have shown that the additional cost per company for compliance averages $1.4 million to $4.4 million. Recognizing the significant burden on small-cap companies, the SEC extended (for a year) the time for companies with under $75 million in market capitalization to comply with SOX's internal control requirements.

The Wall Street Journal reported that the number of companies delisting their shares from the stock exchanges tripled in 2003. When public companies go private, investors lose potentially beneficial investment options. More importantly, emerging businesses often cannot grow to their maximum potential unless they can afford access to the public markets—to the detriment of both competition and innovation.

It could grant the SEC the authority to require certifications for smaller businesses less frequently than once a year. Smaller companies, with revenues of less than, say, $500 million, which necessarily pose less risk to the economy, could be permitted to undergo less intensive audits in most years, with auditors providing so-called "negative assurance" that nothing came to their attention following a less intensive review. These smaller companies could have the more intensive review every other year or every third year to reduce costs but still ensure appropriate auditor oversight.

Another area where smaller businesses are particularly affected is the accounting change to treat options as a compensation expense. Although there were sound reasons for the change, smaller companies have difficulty attracting and keeping top talent without option-based compensation. Consequently, the requirement to expense options can be a real impediment to growth.

Accurate financial reporting by public companies is the goal of SOX reforms. These changes to SOX may come in the form of revisions to SEC regulations or, if necessary, new legislation. When Congressional hearings or regulatory review take place, there are likely to be a range of good ideas about how to achieve public protection and lower costs. Fine-tuning legislation or regulations is never glamorous work, but some reform of the reforms can preserve the important benefits of SOX while curbing its unintended consequences for emerging businesses and the competition and innovation they provide.