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Governance

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?