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November 1, 2009

Opinion divided over SOX delay for small companies in the US

A further delay in the implementation of Section 404(b) of the Sarbanes-Oxley Act (SOX) for small public companies is a negative move with few benefits, one US firm has warned.

At the same time, the US Institute of Management Accountants (IMA), which 18 months ago was calling for the requirements to be waived or completely redesigned for small public companies, is pleased with the way they have been made more scalable.

The Securities and Exchange Commission (SEC) this month delayed the SOX implementation deadline to fiscal years ending on or after 15 June 2010 for the smallest US public listed companies – those with public floats of less than $75 million – to allow extra time to design, implement and document internal control systems before auditors are required to attest to their effectiveness.

An assurance partner of a large East Coast firm believes the delay is unnecessary and embarrassing to firms who had encouraged clients to become SOX-ready by the end of this year.

“It did not make much sense to me because most companies have been complying on an internal basis as they have been doing management assessments for the past two years,” Marcum assurance partner-in-charge Gregory Giugliano said. “We also lose a little faith with our clients as we have been encouraging them to start this and then it gets delayed again.”

The exemption period for small companies was previously due to end for fiscal years ending on or after 15 December 2009, which means most small listed companies had either prepared for implementation or chosen to de-register their listing.

The SEC extended the date so it could complete a study on whether additional guidance provided to company managers and auditors in 2007 was effective in reducing the costs of compliance.

More relevant

Bruce Pounder chairs the IMA’s small business financial and regulatory affairs committee. He said the IMA is happy with the additional guidance provided in 2007 because it made the internal and external audits of internal controls over financial reporting more scalable and risk-based. The guidance helps management and auditors to establish what is important to stakeholders and adjust procedures accordingly.

Giugliano estimates client audit fees increase by between 20 percent and 40 percent due to SOX implementation, and additional cost can vary from $10,000 to $200,000.

“Clients also have to absorb internal expenses, which can include internal staff time or the use of external consultants,” he said.

The added costs are one reason Pounder said small companies that have not yet complied with 404(b) must act now.

“There is going to be a new cost hit, there is no question about it and one of the things that came out in an SEC study released earlier this month about the cost and benefits of 404 compliance is the costs are clearly proportionately higher for smaller companies than for larger companies,” Pounder said.

“It is absolutely a bigger issue for smaller companies to think about how they are going to pay for this, where the money is going to come from and how they can make sure this is not a financial disaster.”

Companies preparing for compliance must also evaluate whether they are happy with their current external auditor as the same auditor must be used for 404(b) requirements, Pounder added

“If you are thinking about changing auditors, now is the time to do that, before you get into the more involved requirements for 404(b),” Pounder said.

Grant Thornton US national managing partner of public policy and corporate governance Trent Gazzaway also warned companies against delaying implementation any longer.

“An organisation’s efforts to prepare for compliance often uncovers costly inefficiencies and potentially damaging risks. Companies that wait for another delay could also be delaying opportunities to make enhancements that could improve their bottom lines,” he said.

Gazzaway’s comments follow a recent survey of senior financial executives by Grant Thornton that found 74 percent of respondents thought small listed companies should not be forced to comply with Section 404(b).

Marlene Hutcheson, a partner at Las Vegas-based firm De Joya Griffith & Company, believes the extension is positive.

“Some filers were (also) thinking of ceasing being a reporting company because they were not ready but with the extension some of these companies will rethink and may revisit their business plan to incorporate becoming SOX compliant and continue to file,” she said.

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