Small Businesses Seek Sarbanes-Oxley Exemption, but Key Lawmakers Look to SEC
Lawmakers in both chambers are pushing bills to reduce requirements for small business compliance with auditing regulations enacted in the 2003 Sarbanes-Oxley accounting law, but it’s unclear whether Congress will modify the landmark law or — as House Financial Services Chairman Barney Frank (D-Mass.) prefers — wait to hear from the Securities and Exchange Commission before making changes.
The law, named for former Senate Banking ranking member Paul Sarbanes (D-Md.) and former House Financial Services Chairman Mike Oxley (R-Ohio), was enacted in the aftermath of scandals at Enron Corp. and WorldCom Inc. Sarbanes-Oxley (PL 107-204) was hailed by consumer and shareholder groups as a long-overdue crackdown on fraudulent corporate financial and accounting practices.
But some lawmakers worry that Section 404 of the law, which governs companies’ internal control over their financial reporting, might be too burdensome on small businesses. They’d like to waive, or at least ease, some of those requirements for smaller businesses.
On Tuesday, Rep. Gregory Meeks (D-N.Y.) reintroduced legislation that he said would reduce the burden on small businesses trying to comply with Sarbanes-Oxley.
Meeks told CongressNow that the bill, the Competitive and Open Markets Protecting and Enhancing Treatment of Entrepreneurs Act, would allow companies to voluntarily comply with standards that better fit their size while still insuring that they protect their investors.
Under the legislation, companies with a market value of less than $700 million would be exempt from Section 404 requirements. Such companies would still be required to implement stricter internal controls, greater transparency and prohibitions against conflicts of interest. The legislation’s supporters say that compliance is too burdensome for smaller companies and the rules are too vague for the SEC to implement.
Meeks’ bill has the support of Reps. Tom Feeney (R-Fla.) and Pete Sessions (R-Texas), who have signed on as co-sponsors, but it does not yet have the support of House leaders.,
A spokeswoman for Frank said that her boss is waiting for a ruling by the SEC and the Public Company Accounting Oversight Board about how small business should comply with the law before deciding if further action is necessary.
Meeks conceded that he has had “no promises either way from anyone. I spoke to my chairman, Mr. Frank, and he’s not with me at this time. He thinks it should be done by the regulator.”
Resistance to legislation that would change the compliance requirements for small businesses stemmed from fear that the bill would open up Sarbanes-Oxley to further changes.
“I don’t want that to happen, nor do I believe that it would happen,” Meeks said. “If it wasn’t for that fear, I’d have more individuals jumping on this bill and pushing for it to happen in a quicker fashion.”
In the Senate, Jim DeMint (R-S.C.), who sponsored similar legislation in the 109th Congress, is expected to introduce companion legislation.
In the meantime, Senate Small Business Committee Chairman Sen. John Kerry (D-Mass.) and Olympia Snowe (R-Maine), the committee’s top Republican, have called for a delay in small businesses compliance, requesting that such companies be given another year before Sarbanes-Oxley Section 404 becomes effective.
A recent Government Accountability Office study found that small public companies spend disproportionately more than big companies in implementing Sarbanes-Oxley, particularly Section 404. The report found that firms with less than $75 million in market capitalization were spending 877 percent more than larger counterparts — $1.14 in audit fees per $100 of revenue, compared to just $.13 per $100 for firms with greater than $1 billion in market capitalization.
Legislation to ease the burden of smaller companies trying to comply with Section 404 was first introduced last Congress by Feeney and DeMint, who said that the high burden of regulation has been putting investors, companies, and the American economy at a disadvantage.
At that time, the SEC had been reviewing a proposal to exempt smaller companies, but no official rule has been handed down, and the bill saw no action. Treasury Secretary Henry Paulsen has said that, generally speaking, Sarbanes-Oxley has been working effectively and that a new SEC rule will address the concerns related to implementation of Section 404.
Meeks added in an interview, “I’m hoping that the SEC will come out with a regulation that will help save these businesses and make the bill move. But I can’t take that chance. I’ve been waiting for a while.”
Meeks said that with the law’s authors still sitting in Congress last session, he knew that the bill would go nowhere. “Now with both of them retired,” he said, “maybe we can get done what we need to get done.”