The Securities and Exchange Commission took a step Wednesday toward easing Sarbanes-Oxley accounting requirements for small public companies. While the little guys have been complaining about the rules since 2002, when they were put in place after Enron's collapse, legislators have not heeded their calls until now.
Among the biggest changes that the agency unanimously agreed to was allowing companies more flexibility with Section 404 of the law, which calls for strict internal controls and reporting requirements. The change would allow companies to assess their greatest risks rather than testing a long list of controls.
"Short of eliminating Section 404 for small business, this is probably the second best alternative in the current political environment," says Nimish Patel, a partner at Los Angeles law firm Richardson & Patel LLP. Right now, firms worth less than $75 million don't have to comply with that section until next year, but some small-business advocates say that the date should be pushed back even further.
Business owners already say the rest of the regulations hit them excessively hard because they don't have the sophisticated accounting departments of their larger counterparts. A new study shows that the requirements are more than just a painful thorn in the side of small companies. Firms valued at less than $75 million paid 10 times more in director fees than big ones, according to University of Georgia finance professor James Linck. In 2004, small companies paid on average $3.19 in director fees per $1,000 of sales compared with large firms that paid 32 cents, according to a study that looked at the boards of more than 8,000 companies.
That might force many firms to exit U.S. public markets or consider listing on exchanges outside of the U.S., says Linck: "The impact of this law isn't necessarily being felt, to the same extent, by the companies it was intended for. It's easier for big firms like Wal-Mart to hire more directors than Joe's Candy Shop."
His study backs up findings last year from the Government Accountability Office, which said that the number of public companies that went private jumped to 245 in 2004 from 143 in 2001. It also found that the number of companies with less than $25 million in revenue declined to 46 percent of initial public offerings in 2004 from 70 percent in 1999. The SEC-proposed changes will be open to public comment before they are finally approved.