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
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
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
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
“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
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
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
“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
“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.