Should Smaller Public Companies
be Exempted from Complying
with SOX Section 404(b)?
On July 21, 2010 the Dodd-Frank Wall Street Reform and Consumer Protection Act provided the non-accelerated public companies (those with a market capital below $75 million) a permanent exemption from complying with the Sarbanes-Oxley (SOX) Section 404(b). The Section 404(b) would have required these smaller companies to do what larger companies over the $75 million market cap are currently doing; requiring an external auditor to audit their internal controls over financial reporting. However, what may seem like a huge win for the smaller companies who long have complained about the cost out weighing the benefits of complying with the standard, does not appear that way to everyone.
Sarbanes-Oxley (SOX) Act Section’s 404 (a) and (b) were created to help restore the public’s trust in what public companies are reporting in their financial statements, as well as the opinions on the reports that the auditors are providing on the financial statements. SOX 404(a) implies that managements of public companies assess and report on whether their internal controls over financial reporting (ICFR) are effective (United States Securities and Exchange Commission [SEC], 2009); in order to ensure that those requirements in Section 404(a) are being met, public companies are required to have an external auditor attest to management’s assessment over the ICFR (SEC, 2009). While SOX 404(a) is required by all public companies, Section 404(b) was required only by large companies (those with a market cap greater that $75 million). As for the smaller public companies (those $75 million and under), they were granted numerous extensions and were eventually permanently exempted. The main purpose of SOX 404 was to alleviate the growing tension between investors, government agencies, and public companies. While the public trust is continuing to be restored, according to research and studies; unintended circumstances of the SOX 404 implementation caused massive financial burdens for smaller public companies (Garrett, 2009). The outcries from the small public companies were answered by numerous extensions on the compliance of SOX 404(b). This was in order to give these companies more time to get their internal controls in place for external auditors to attest to them. Finally, on July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) was passed. The Dodd-Frank Act provided permanent exemption from complying with the SOX 404(b) for non- accelerated public companies (those with a market capital below $75 million) (Dodd-Frank Wall Street Reform, 2010, pg. 583). As a result of this Act, another issue surfaced as to why permanently exempt the smaller companies from SOX 404(b). All public companies, to include smaller public companies, should be held to the same standards and be subject to the rules under SOX 404(b). Instead of permanently exempted them, the SEC should have came up with a way to make it more cost effective to comply. This paper will address arguments from both sides of the Dodd-Frank Act, and why smaller firms should be required to comply with SOX 404(b). ANALYSIS
The permanent exemption comes as a relief for the small public companies as complying with SOX 404(a) has been very expensive and time consuming. By adding to the cost associated with complying with SOX 404(b), it would be more than they would be able to handle. A study conducted by Financial Executives International, showed that the cost of complying with SOX for those public companies whose market cap was under $100 million was approximately $824,000 compared to $1.5 million for those who market cap is between $100 million to $500 million, at the time the article was written (Wolkoff, 2005). Furthermore, Wolkoff (2005) goes on to say that at the AMEX median, the median revenue for its companies are $57...
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