- The Washington Times - Tuesday, August 16, 2005

The new accounting requirements of the 2002 Sarbanes-Oxley Act have harmed small publicly traded companies, ranging from old-fashioned community banks to startups and biotechnology firms. That much appears increasingly clear in light of mounting expert opinion and the number of aggrieved executives from small firms lobbying for relief or de-listing their companies from stock markets in frustration. Even Rep. Michael Oxley, Ohio Republican, thinks the legislation that bears his name overreached. Thus it’s noteworthy that Christopher Cox, the newly installed Securities and Exchange Commission chairman, last week signaled that he expects to use the SEC’s studies on Sarbanes-Oxley’s burdens on small companies to minimize costs and bring reason back to accounting regulations for those firms.

Those studies will come from the SEC’s new Advisory Committee on Smaller Public Companies, created in December to study and solicit input on the subject. This month, the group asked small-business CEOs for opinions and received 42 responses the first day.

In several public meetings it has held on Sarbanes-Oxley and small businesses, startling evidence of the burdens has emerged. William J. Carney, a law professor at Emory University, told the commission that in 43 small companies he studied that de-listed from the market in 2004, the average added cost of compliance with Sarbanes-Oxley was 32 percent of that year’s profits. In total, compliance activities swallowed 53 percent of profits. On average, Sarbanes-Oxley tripled these companies’ compliance expenditures, a fact which one-third cited as a reason for de-listing. More than a third of the companies he studied were community banks and thrifts which “will no longer be owned by the community in many instances” after going private. So, it’s evident Sarbanes-Oxley is harming the type of yeomanly small businesses congressmen normally love to love.

It’s also harming high-tech companies and startups. James A. Clark, CFO of Critical Path, Inc., a San Francisco software developer, told the committee that compliance cost his company 4 percent of 2004 annual revenues, a five-fold increase over 2003. Compliance “conflicted with ongoing business processes such as budgeting and forecasting, collections and reporting,” he said. Surely lawmakers never meant to strangle high-technology companies. But it appears that’s what Sarbanes-Oxley is doing.

Back when Mr. Cox was nominated to become SEC chairman, we wrote that his experience as a securities lawyer, as well as his acumen for numbers and free-market philosophy, made him an ideal choice for the job. Thus, we’re pleased — and not surprised — to hear him remark that “smaller firms shouldn’t be disadvantaged by higher relative compliance costs.” They shouldn’t. We look forward to the SEC’s moves under his stewardship to correct the problem.

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