SEC delays Sarbanes-Oxley requirements for small businesses

The Securities and Exchange Commission (SEC) has provided small businesses another 1-year delay to comply with Sarbanes-Oxley Section 404 requirements. Section 404 is the part of Sarbox that requires management to attest to the effectiveness of internal controls over financial reporting.

“This will help ease the burden on small firms and help encourage more small businesses to become public companies – while still ensuring transparency and honest accounting,” said Senator John Kerry (D-MA), chairman of the Senate Committee on Small Business and Entrepreneurship.

I see how this eases the regulatory burden on small entities, thereby indirectly encouraging small businesses to go public where they might otherwise not, but it remains to be seen how this “still ensures transparency and honest accounting”. How does not requiring companies to fully examine their systems of internal control and have management sign off on their effectiveness ensure anything?

It has been nearly five and a half years since Sarbanes-Oxley was implemented in the wake of the Enron meltdown and the delay applies to companies worth $75-million or less. When will smaller public companies be held to the same standard as larger ones?

Since the law was passed in 2002, the SEC has delayed compliance four times for small businesses. Currently, small companies … are expected to comply with the management guidance part of the law this year and the auditing section by 2009.

Legislators worked quickly to draft and pass Sarbanes-Oxley to protect investors in the aftermath of accounting scandals. Is it reasonable that it will be 7 years before it is in place for the smaller public companies in the US?

One thought on “SEC delays Sarbanes-Oxley requirements for small businesses

  1. On a mostly unrelated note, this whole issue makes me think of a local deli that is shutting down its business because of the hassle, I’m told, of complying with stricter meat-packing regulations – they do a lot of stuff from scratch in house.

    Convenient excuse, or hard reality of over-regulation that the big firms deal with just fine?

    Hard to say. I will, however, put on my “yay SOX” jersey and say that doing a controls audit of firms that’ve gone through the SOX process is an incredibly huge improvement that makes auditors’ lives much less stressful.

    And it should, in the end, reassure investors to know that there’s a defined policy for how the company they invest in handles its assets and processes, rather than flying by the seat of its pants.

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