'Smaller Public Companies and Sox\r'

'Should Sm eitherer everyday Companies be Exempted from Complying with SOX divide 404(b)? ABSTACT On July 21, 2010 the Dodd-Frank Wall bridle-path repair and Consumer Protection scrap renderd the non-accelerated earthly concern companies (those with a market gravel crestital below $75 zillion) a changeless right from surveiling with the Sarbanes-Oxley (SOX) Section 404(b). The Section 404(b) would deal required these little companies to do what humongousr companies every set out the $75 trillion market cap ar currently doing; requiring an impertinent attendant to audit their native controls all all over monetary reporting.However, what may seem want a huge win for the littler companies who recollective have complained about the greet out calculation the benefits of accompanying with the standard, does non appear that way to everyone. INTRODUCTION Sarbanes-Oxley (SOX) serve Section’s 404 (a) and (b) were created to help doctor up the populac e’s trust in what common companies ar reporting in their fiscal statements, as wellspring as the opinions on the reports that the auditors be providing on the financial statements.SOX 404(a) implies that managements of ordinary companies assess and report on whether their innate controls over financial reporting (ICFR) atomic number 18 impressive (joined States Securities and Exchange Commission [ due south], 2009); in order to encounter that those requirements in Section 404(a) are being met, populace companies are required to have an external auditor attest to management’s assessment over the ICFR (SEC, 2009). While SOX 404(a) is required by all earthly concern companies, Section 404(b) was required only by gigantic companies (those with a market cap great that $75 million).As for the meeker macrocosm companies (those $75 million and under), they were grant numerous extensions and were eventually permanently exempted. The main single-valued function of SOX 404 was to alleviate the growing tension in the midst of investors, governing body agencies, and common companies. While the mankind trust is proceed to be restored, according to research and studies; unintended component of the SOX 404 execution caused massive financial burdens for smaller semipublic companies (Garrett, 2009).The outcries from the small public companies were answered by numerous extensions on the entry of SOX 404(b). This was in order to give these companies to a greater extent time to get their informal controls in place for external auditors to attest to them. Finally, on July 21, 2010, the Dodd-Frank Wall bridle-path Reform and Consumer Protection Act (Dodd-Frank Act) was passed. The Dodd-Frank Act provided permanent exemption from travel alonging with the SOX 404(b) for non- accelerated public companies (those with a market capital below $75 million) (Dodd-Frank Wall roadway Reform, 2010, pg. 83). As a result of this Act, a nonher flex up surfaced as to why permanently exempt the smaller companies from SOX 404(b). All public companies, to include smaller public companies, should be held to the homogeneous standards and be subject to the rules under SOX 404(b). Instead of permanently exempted them, the SEC should have came up with a way to make it more live efficient to comply. This paper will address arguments from twain sides of the Dodd-Frank Act, and why smaller firms should be required to comply with SOX 404(b).ANALYSIS The permanent exemption comes as a informality for the small public companies as complying with SOX 404(a) has been very pricy and time consuming. By adding to the equal associated with complying with SOX 404(b), it would be more than they would be able to handle. A study conducted by monetary Executives International, showed that the cost of complying with SOX for those public companies whose market cap was under $100 million was almost $824,000 compared to $1. million for those who ma rket cap is between $100 million to $500 million, at the time the article was scripted (Wolkoff, 2005). Furthermore, Wolkoff (2005) goes on to say that at the AMEX normal, the median revenue for its companies are $57 million, which means that for these companies to comply with SOX 404(b) it would cost close to 1. 5% of its median revenue(Wolkoff, 2005). Specifically, Wolkoff states that this could â€Å" staidly” have a negative impact on these companies operating margins and â€Å"in many cases to near zippo — and depleting funds available for a reinvestment” (Wolkoff, 2005, pg. ). In addition, resources that could be used for other more important blood line emergencys would be diverted to costly â€Å"dull documentation requirements”, and would non be worth the benefits derived (Garrett 2009, pg. 1). counterbalance after the creation of Auditing Standard No. 5 (AS5), a study done by George cap University, nominate that the decrease that big publ ic companies found with the relief provided from AS5 was not the case for smaller public companies (Garrett, 2009).Furthermore, NASDAQ research showed that based on revenue luck it would cost 11 times more for smaller companies than larger companies to comply with SOX 404 (b), which creates an â€Å"unfair competitive utility for larger companies” (Garrett, 2009 pg. 1-2). Not to mention that these smaller companies cogitate that the cost associated with SOX 404(b) far outweighs the benefits of compliance (Wolkoff, 2005).On the other hand, foeman’s of the Dobb-Frank Act believes that despite the George Washington University and NASDAQ studies, SOX 404 cost are still expected to go eat up and that the reduction is not only due to the h senileation of AS5, unless because of other factors. For instance, the cost of complying with SOX 404 is expected to rest to go down as companies continue to implement and document effective controls and move into the â€Å"mainte nance physical body of monitoring and reporting” (How Potential Changes in minuscule-Company, 2006, pg. 7).As this relates to SOX 404(b), this could overly mean that once the external auditors have complete their first audit of the company’s internal controls and improvements are do based on the proceeds of the audit, audit fees should go down because the audits will gravel easier since any ineffective internal controls should have been or is being addressed. Another SOX 404(b) obstacle that proponents of the Dobb-Frank Act believed threaten the small companies was that the Securities Exchange Commission (SEC) was trying to happen upon a â€Å"one size fits all” approach.Meaning, the SEC was trying to use the same standards for both large and small companies when regulating corporate organisation. Proponents felt that this was unworkable because larger companies were in a better financial position to handle the expense for consultant and external audit fees that came with the SOX 404 regulations. For ex angstromle, an increase auditing bill to $500 cubic yard for a company who has a $10 billion market cap would not have the same effect on a company with a market cap of $100 million (Wolkoff, 2005).Conversely, an compendium done by CRA International for the Big Four, inform that audit fees did not make up the majority of the cost associated with SOX 404. Specifically, the smaller of the larger companies that had to comply with all sections of SOX 404 (i. e. , those with market caps between $75 and $700 million); 35% of those be were related to audit cost (How Potential Changes in Small-Company, 2006) as it relates to SOX 404(b). Additionally, those companies with a market cap over $700 million, only 26% were related to audit cost (How Potential Changes in Small-Company, 2006).Although the compliance with SOX 404(b) was implemented to restore investor’s confidence, Wolkoff (2005) states that in doing so caused a obstruc tion in the be of small firms that would go public both domestically and overseas. The Amex has seen the impact as the number of small companies that have delisted from the Exchange has increased (Wolkoff, 2005), and those that would have joined decided not to, which reduces the number of initial public offerings in the United States.The SOX Act, specifically, Sections 404(a) and (b), didn’t take into account that large companies have a more colonial business structure, which makes for more complex accounting practices (Wolkoff, 2005). For example, the segregation of duties obstacles that many smaller companies are faced with and do not have the resources to make water this control problem. According to Wolkoff (2005), the SEC should have taken that into consideration the â€Å"market cap” or â€Å" nominal revenue” that a company generates and apply assorted standards accordingly (pg. 1).Another point that proponents of the Dobb-Frank Act made was that sca ndals standardised Enron are least likely to happen in smaller public companies. The reasoning behind this is that smaller companies are not normally out to tractor trailer themselves. This is because these smaller companies are usually run by the people that founded the companies or closely related (Wolkoff, 2005). However, by requiring smaller public companies to comply with SOX 404(b), will not only ensure that they are in compliance with SOX 404(a), merely it will also help these companies by uncovering inefficiencies in some processes.This in turn will help the companies because it will â€Å"…makes fraud harder to direct and easier to detect” (Aguilar, 2010, pg. 33). Especially since smaller companies are in a better position and at greater venture for committing fraud and accounting manipulations (Aguilar, 2010). Furthermore, who is to say those smaller companies’ investors do not deserve the same take of confidence and â€Å"financial reporting saf eguards” that larger public companies’ investors are receiving (Solnik, 2010).In addition, studies have shown a correlation between â€Å"weak internal controls and poorer earnings relative to effective internal controls” (Hamilton, J. , 2009). In time of a declining economy, the temptations for ambidextrous reporting is increased and by having smaller companies comply with SOX 404(b) serves as a deterrent for those temptations (Hamilton, J. , 2009). Lastly, smaller public companies feel that they have already spent a lot of money just to be in compliance with SOX 404(a), and do not feel the need to be monitored by external auditors.This is because they feel that are capable of monitoring, finding, and remediating deficiencies through internal audits (Solnik, 2010). However, as antecedently mentioned, SOX 404(b) was not only put in place to ensure that public companies were in compliance with SOX 404(a), moreover to also have it attested by an independent audi tor. This not only helps restore investor’s confidence, but also provides the public companies beneficial information as to whether or not they have proper controls in place and/or additional controls are needed.Moreover, small companies may be putting themselves at risk especially, if the investors penalized them for not meeting the â€Å"transparency norms” that is projected by external auditors (Silverstein, 2008 pg. 26). Especially since there are approximately 7,300 smaller public companies, which accounts for 65% of the overall public companies (Hamilton, J. 2009). CONCLUSION While there are acceptable cases made from both sides of the Dobb-Frank Act, permanently exempted smaller companies doesn’t solve the issue of ensuring compliance with SOX 404(a) is being followed.More importantly, it doesn’t provide the smaller public investors with the same confidences as large public investors as to whether or not the proper controls are in place, and/or wh ether the controls are effective. By having external auditors attest to ICFR it will provide the smaller companies’ investors the same boost of confidences as its larger counterparts. Instead of permanent exemption, other means should be looked at in order to make it to where it is cost effective to comply with SOX 404(b).Also, as recommended by the describe Advisory Committee, â€Å"[e]xempt some smaller public companies merely from SOX 404 reporting requirements, but add stricter corporate governance requirements for those companies” (How Potential Changes in Small-Company, 2006, pg. 6). That way we will not have to wait until another scandal is made public to scramble and make these changes; as the old saying goes, â€Å"It’s not if, but when”. REFERENCES Aguilar, M. (2010, May). Small filers struggle with internal controls over fraud. Compliance Week, 7(76), 33,74.Retrieved from ABI/ avow Trade & Industry. Dodd-Frank Wall alley Refo rm and Consumer Protection Act. Conference Report to Accompany H. R. 4173. theater of Representative , 111th Cong. 583 (2010). Garrett, S. 2009. Garrett introduces SOX exemption for small businesses, Press release, Oct. 8,2009. Hamilton, J. (2009, June). Section 404 works and is important for small companies, Aguilar feels. SEC Filings Insight,1,4. Retrieved from ABI/ claim Global. How potential changes in small-company SOX regulations could affect your firm. (2006, February).Accounting Office solicitude & Administration Report, 06(2), 1,6+. Retrieved from ABI/INFORM Trade & Industry Silverstein, M. (2008, December). (Sarbanes-Oxley Revisited:) The Good, the Bad, the Lessons. New Jersey Business, 54(12), 26. Retrieved from ABI/INFORM date-mark Solnik, C. (2010, July). Small companies push to gain permanent exemption from Sarbanes-Oxley requirement Silverstein nts. Long Island Business News. Retrieved from ABI/INFORM Dateline. United States Securiti es and Exchange Commission, Office of Economic Analysis. 2009). Study of the Sarbanes-Oxley Act of 2002 Section 404 Internal Control over Financial Reporting Requirements. Retrieved from http://www. sec. gov/news/studies/2009/sox-404_study. pdf Whitehouse, T. (2009, April). SOX 404 Compliance Improves for All but the Small. Compliance Week, 6(63), 42-43. Retrieved from ABI/INFORM Trade & Industry. Wolkoff, N. L  (2005, August). Sarbanes-Oxley Is a Curse for Small-Cap Companies. Wall Street Journal (Eastern Edition), p. A. 13. Retrieved from ABI/INFORM Global.\r\n'