Analysis of Sarbanes-Oxley – Section 404
Affect on Small Companies
I. Executive Summary 1
II. Background Facts 2
III. Issue Stated 3
IV. Analysis 4-5
V. Conclusion 6
VI. References 7
404 of Sarbanes Oxley: It’s affect on small business.
The implementation of section 404 of Sarbanes-Oxley's has presented challenges for many U.S businesses. The implementation rules and guidelines have imposed significant cost and time restraints. Small companies are disproportionately getting hit harder then the larger companies. Financially the smaller companies have disadvantage and can not take on the same rules and guidelines as large companies. The cost involved in implantation and compliance will cost small companies on average
Banks, insurance companies and mutual funds generally do not invest in the companies comprising the bottom 6 percent of market capitalization.
Small companies are not stewards of our national wealth in the same way as large companies. The risk to the economy from the collapse of a small public company is limited not only by its size, but also because the effects of such a collapse would not ripple very far out into the economy. Even a major Enron-style debacle at a small company -- indeed, even the failure of a fair percentage of such companies -- would hardly affect the wealth of the nation at all.
The cost of complying with SOX 404 impacts smaller companies disproportionately, as there is a significant fixed cost involved in completing the assessment. For example, during 2004 U.S. companies with revenues exceeding $5 billion spent .06% of revenue on SOX compliance, while companies with less than $100 million in revenue spent 2.55%.
This disparity is a focal point of 2007 SEC and U.S. Senate action. The PCAOB intends to issue further guidance to help companies scale their assessment based on company size and complexity during 2007. The SEC issued their guidance to management in June, 2007
The most visible argument is that small companies should not have to shoulder the same compliance burdens as large companies do, simply because they can't afford to. But that premise is being challenged by studies, derided by a number of commentators and viewed with public skepticism even by some SEC Commissioners. It assumes that were money no object, small and large companies should be regulated the same. If that assumption is true, then any argument for relaxed compliance that hinges on expense is vulnerable. Cost seldom satisfies as a reason for not doing something that ought otherwise be done.
However, it is wrong to assume that the main difference between small and large companies is how much money they have. Large and...