On the heels of a study that points out the imbalance in proportionate costs for small companies to comply with SOX, Accounting Today reports that The House Financial Services Committee voted that small and midsized public companies should be exempt from Sarbanes-Oxley audit requirements.

The result is a pending bill (Investor Protection Act) that will continue making its way through the legislative process.  But if it does progress it will be a game-changer for companies with market caps under $75 million, as the cost of audits has proven significant enough to alter companies’ strategy and perhaps even hold them back from peak performance. CFO magazine highlights the relief of small companies everywhere in this recent story, in which they note that:

Many financial executives say an exemption would mean the same level of integrity in their financials but with less cost. “We have a fairly good system of internal controls, and we’d like to keep that for our own well-being as much as anything else,” says Marty Schwenner, CFO of digital-power and motion-control systems manufacturer Magnetek, a company whose market cap dropped it from the accelerated filer range to the nonaccelerated filer range this year. “We view internal control as something that’s our responsibility whether or not Congress tells us it’s something that is.”

Mr. Schwenner took the words right out of my mouth, and I applaud his sense of obligation.  Internal controls will always be a crucial piece of the business that streamlines financials and paves the way for airtight fraud prevention, regardless of audit requirements.  We encourage non-accelerated filers to enjoy the potential relief of the exemption, but to remain vigilant when it comes to maintaining and monitoring their financial controls.

The anecdotal evidence was already there, but now the hard numbers are in from an SEC report that proves smaller companies are paying a disproportionately high cost to comply with Sarbanes Oxley.  As CFO Magazine reports in a recent story on audit fees:

Small companies’ perceived cost burden is important because it’s caused a series of delays in the deadline for full Sarbox compliance. The SEC has been dogged by small-business advocates wanting extensions to Sarbox since soon after the regulator first estimated that compliance would cost firms an average of $91,000. In late 2007, under pressure from members of Congress who called for specific cost-benefit dollar figures, then–SEC chairman Christopher Cox responded with the promise of the type of study that was completed [last] Friday.

The report notes that much of the cost is allocated to in-house work necessary to get internal controls in shape.  This is a topic we’re well familiar with, as we’ve spent a great deal of time battling to help small to mid-sized companies.  An article by our Managing Patrtner, Carl Famiglietti, discussed How CFOs Can Control Rising Audit Costs [pdf] and suggested that:

Given the powerful undertow of Section 404, it is of course easy to fall into acceptance of rising fees…but there are ways to take back control of the bottom line.  Companies can follow two distinct yet equally important lines of attack:  easing costs associated with non-audit CPA advisory services and mining governance initiatives for extended ROI.

In the spirit of Carl’s article, MFA is routinely on the front lines alongside the financial departments of small to midsized companies.  With the news last week that small companies received an extension for SOX compliance to on or after June 2010, we are encouraged that the additional time will help us and non-accelerated filers craft strategies that will keep their costs down and their return on investment up.

Last week, new SEC head Mary Schapiro made it clear that small companies will have to comply with SOX.  This is consistent with how we saw the picture taking shape a few months ago, and it brings to a close a history of deadline extensions that have staved off compliance for non-accelerated filers.

In fact, the extension of the SOX compliance date for companies with a capitalization value less than $75M has been an annual event since 2004. Meanwhile, compliance requirements for accelerated filers have been widely recognized as, in many instances, over-reaching and too expensive.

But the time has come for universal compliance, according to Schapiro:

[Schapiro] says she wants to work with small businesses to make sure they have the tools to comply with Sarbanes-Oxley.

“It’s time that we bring uniformity to the system so that investors know what to expect from companies, while being sensitive to the needs of small businesses,” she said.

The new SEC chairwoman said internal company controls guarantee “accurate, robust and easy-to-understand financial reporting,” which is “critically important to investors and to the efficient functioning of our markets.”

Small businesses, which make up well over half of all traded companies, though a tiny fraction of overall market value, have complained that the costs of complying with the law would impose an undue burden on them.  In recognition of this, MFA has in place scaled down compliance requirements for non-accelerated filers, which are already deemed acceptable by our clients’ external audit firms.

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