Medical Device Daily

WASHINGTON – The SEC last week issued plans to improve the burden placed on small public companies by the Sarbanes-Oxley Act, at the same time lawmakers here introduced a bill aimed at a legislative fix.

There has been a barrage of complaints on the costs of compliance with one part of the law, Section 404, which principally deals with internal and external auditing requirements, and lately some weighty reports have seconded those charges. In particular, companies with little to no revenue have found themselves paying large fees for testing internal controls in order to comply with Sarbanes-Oxley's Section 404, and in a notable statement, the SEC said it would consider reform proposals scaled to the individual circumstances.

“The steps we are announcing today are designed to further improve the reliability of financial statements and to better protect investors,” SEC Chairman Christopher Cox said in a statement, “while making the Section 404 process more efficient and cost effective.”

Multiple reports delivered to the SEC in recent weeks – from the Government Accountability Office and the SEC's own Advisory Committee on Smaller Public Companies – have found that its one-size-fits-all approach is particularly burdensome for smaller companies. Feedback also came from a recent SEC roundtable event on second-year experiences with Section 404.

It is estimated that the average compliance cost for Section 404 is $3.8 million, with smaller businesses paying more than twice as much (as a percentage of revenue) as large businesses.

The regulatory agency said no companies would receive an outright exemption from Section 404 requirements, though it is giving an extended grace period for the smallest company filers, those with market caps less than $75 million. Opponents to Section 404 reform, such as the so-called “Big Four” public audit firms, have argued against any exemptions, regardless of size, and instead favor a strict adherence to the original legislation.

The agency last month received advisory committee recommendations on scaled reforms that include relief from management and external auditor attestation requirements for companies defined as small cap or having market caps of $787 million with less than $10 million in product revenues, microcap firms that represent the bottom 1% in market cap, and companies with less than $125 million in revenues. The committee also recommended relief for those with a market cap no higher than $787 million and less than $250 million in revenues.

In addition to considering the reforms, the SEC plans to work with the Public Company Accounting Oversight Board to more clearly define auditors' methods for confirming companies' internal control testing, which could keep costs down.

Still, a final SEC decision is months away.

Sen. Jim DeMint (R-South Carolina) and Rep. Tom Feeney (R-Florida) unveiled the measure, called the COMPETE (Competitive and Open Markets Protecting and Enhancing Treatment of Entrepreneurs) Act. It would allow companies to sidestep Section 404 and instead voluntarily comply with standards that better fit their size – those with less than $125 million in product revenue would be allowed to opt out of the internal control requirements.