soxoverview

Designed to protect investors and restore confidence in the U.S. financial system after scandals at firms like Enron and WorldCom, the Sarbanes-Oxley (SOX) Act is having positive effects on corporate America. Board independence has been strengthened, accountability is moving back to shareholders, and difficult questions are once again being addressed.

But Section 404 of the legislation, which calls for public companies to establish and maintain an internal control structure for financial reporting, has resulted in implementation costs that have far exceeded original expectations. Because its compliance framework is designed for large, well-established organizations, its costs have hit smaller companies much harder than others, hampering competitiveness and job growth in a vital segment of the economy. SOX has become yet one more burden in the steep climb towards an initial public offering (IPO) that is especially difficult for small companies. Many firms are now choosing to remain or become private, others are considering being acquired, and yet others are turning to international stock exchanges for their IPOs.

To create a fairer climb to the top, SOX’s disproportionate compliance costs for smaller public companies need to be addressed. In large part, this can be handled by streamlining the implementation framework and testing requirements for Section 404. Further clarification of SOX’s rules and intentions is needed to ensure that management and auditors alike feel comfortable using good judgment and common sense without fear of liability.

The Chamber will work with business groups and public officials to advance the following five recommendations with the Securities and Exchange Commission (SEC):

1. Establish small company criteria: The SEC should clearly define what constitutes a smaller public company by using market capitalization and revenue breakpoints that are well understood.

2. Revise compliance requirements for small companies: The SEC should address today’s overly burdensome compliance procedures by exempting smaller public companies from certain aspects of Section 404.

3. Provide guidance to small companies: The SEC should provide additional guidance to smaller public companies by outlining approaches and best practices for conducting a cost-effective self audit of internal controls.

4. Improve audit efficiencies: The SEC and Public Company Accounting Oversight Board (PCAOB) should work for the widespread adoption of top-down, risk-based audits of internal controls by the accounting industry.

5. Streamline accounting industry standards: The SEC should work formally with the Financial Accounting Standards Board (FASB) and the PCAOB to develop streamlined accounting standards and reduce complexities faced by smaller companies, while providing benefits to all.

These actions will help clear many of the rocky paths that can inadvertently cause problems for smaller public companies, and ensure they meet the requirements of better corporate governance in an efficient and cost-effective manner.