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?


Weekend reading

Small Is Essential

At 37signals, a company with just eight employees whose Web-based collaboration software is used by thousands of small businesses, there isn’t time to sit around a conference room sipping latte and deconstructing memos. Come to think of it, there isn’t even a company conference room. There are just a couple of cubicles, loads of brainpower and three simple goals: make useful business software, make it easy to run, make money selling it. Repeat.

Fraud too pervasive to roll back SarbOx

In a new examination of 374 companies accused of securities fraud between 1997 and 2002, an average of seven people were implicated in each case… CEOs were implicated in nearly 90% of the cases examined. Next came CFOs, 78%. Then board directors, 40%; vice presidents, 36%; COOs, 20%; controllers, 19%; and general counsels, 7%. Big accounting firms were implicated in 18% of the cases.

The End of Independent Advice & Counsel

When a consultancy offers solutions, it has made its bed with a handful of technology or other vendors that will provide some portion of the service/product combination that will be sold to clients. When a consultant is truly independent and objective, they are solution independent and will help clients select the best solution for the client (not for the integrator).

PwC: Internal Auditors May Be Missing Risks

Between departments and across the enterprise, more parties have gotten involved in assessing risk and contributing to the company’s risk management process. That has led to some confusion and overlapping of responsibilities. One-third of the internal audit managers surveyed said their companies conduct multiple risk assessments across the organization, but the majority do not coordinate their work or results. The effect is inefficient and redundant presentations before audit committees.

Must I Play Golf To Get Ahead?

In a 2004 survey of 1,000 women golfers, 73% said that the game had helped them develop important business relationships, and over half said that being able to talk knowledgeably about golf had contributed to their success.

Accounting Blogs

The Sarbitch is back

The Accounting Observer has invented a new term: Sarbitching. I love it!


What Enron meant to me

Enron burst into flames around January 2002. I was just starting my second semester at Brock University in the esteemed Bachelor of Accounting program when the Houston-based company went down.

What did this mean to a 19-year-old Canadian accounting student with no share holdings and no knowledge of the energy trading giant from Texas? Actually, a lot more than I’d ever have imagined.

From then on, every single accounting or even business class I took touched on Enron in one way or another. I don’t think another class of accounting students got such an in-depth education in various types of off-balance sheet financing.

The business ethics course I took during the balmy summer of 2003 was dominated by Enron. Sure, there were other cases. Eli Lilly and Union Carbide spring to mind. But Enron was dominant. And, as accounting students, Arthur Andersen’s complicity in Enron’s deception was also a focal point in class discussions.

We studied Sarbanes-Oxley, the comprehensive legislation enacted in the wake of Enron and aimed at preventing a repeat, as it occurred. It’s primary focus is on documenting controls. At the time I probably knew more about Sarbanes-Oxley’s requirements than the people it was going to affect the most – management at American companies.

Right around that time the reference in the CICA Handbook to “assuming management’s good faith” was removed, mainly to avoid the legal liability issue that such an assumption may give rise to in the event of another Enron.

Enron changed a lot. Accounting was thrust into the spotlight in terms of further government regulation, the Big Five became the Big Four accounting firms, and nothing will ever be like it was.