Stop strangling startups

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Evidence continues to mount that the 2002 Sarbanes-Oxley accounting law unduly burdens small publicly traded companies. The Securities and Exchange Commission has spent the last year and a half compiling the evidence. If anyone in Congress bothers to read the horror stories its committee on small publicly traded companies has compiled, they'll know they need to loosen Sarbanes-Oxley's requirements for smaller firms and startups.

Here's what the SEC heard from Donald S. Perkins, chairman of the board of Nanophase Technologies, a small Illinois-based maker of nanocrystalline materials: "We have only 50 employees. Three of these are finance and accounting professionals... In 2004 over $259,000 (5% of our sales) was spent and over 1,000 hours were used for us to produce a SOX-404 result that showed no material weaknesses." In other words, Nanophase's three-person accounting department is spending about one-sixth of its work year on Sarbanes-Oxley. Like many biotechs and nanotechnology companies, Nanophase did not earn a profit in 2004, so the 5 percent of revenues it spent on Sarbanes-Oxley comes dearly. Lest anyone think this is a one-time occurrence, Mr. Perkins said he estimates 2005 to cost about two-thirds of last year. "Because of the one-size-fits-all approach to SOX-404 requirements, an unwarranted and, we believe, unnecessary burden has been put on our small company," he concluded.

Here's a question worth pondering: What would have happened to a startup Microsoft or Oracle Corp. had this law been around in 1980? To judge by SEC data on companies going private since Sarbanes-Oxley was passed, many smaller companies are now deciding that access to capital markets and trading on public exchanges aren't worth the price of compliance with Sarbanes-Oxley. Could this be strangling the future Microsofts and Oracles in their cribs?

It's not just startups; old-fashioned thrifts and savings associations are hurt too. Here's what the SEC heard from Charlotte M. Bahin, senior vice president of America's Community Bankers, which represents more than 1,200 banks, thrifts and savings associations: "Public community banks are particularly stressed by many of the new securities law changes," some "to the point that it becomes unreasonable to remain public." Sarbanes-Oxley is also harming the type of small business that lawmakers on both sides of the aisle regularly try to cultivate.

This could be fixed relatively easily if Congress were inclined to do it. Writing yesterday in the Wall Street Journal, former Sens. Bob Dole and Tom Daschle outlined some common-sense reforms to Sarbanes-Oxley we hope lawmakers will heed. First, Congress could allow smaller companies to be certified every other year or every third year, not annually as currently required. Second, it could focus audits on statements of revenue and lighten the standards for relatively minor items like travel and expense reports. Third, it could allow smaller companies to stop treating options as a compensation expense, since small firms have more trouble keeping talent without options. All these ideas should be on the congressional agenda this fall.