March 14, 2005 -- Sarbanes-Oxley can be a headache for small businesses, but relief may be in sight with the extension of a key upcoming deadline. The Securities and Exchange Commission recently lengthened by a year the timeframe for small- and medium-sized businesses to comply with a Section 404 deadline.
The yearlong extension deals with how long companies have to file a management report and an auditors' report on the effectiveness of their annual-report financial reporting systems. Public companies with market caps under $75 million now have to get their reports in shape for the fiscal year ending on or after July 15, 2006.
The grace period offers companies a little more time to comply, though given the stringent requirements of Sarbanes-Oxley, it's smart for businesses to continue working on compliance now, noted Gartner analyst John Bace in a research note.
Small businesses have long objected to Sarbanes-Oxley, which was instituted to require more accurate financial reporting and better board governance. Especially contentious is Section 404, which requires public companies to put measures into place that document and verify financial results. The cost of this is too high for small businesses, opponents say; CFO magazine estimated it could reach $500,000 a year.
One concern among small businesses is that the capital needed to cover the cost of compliance is also needed to accelerate their growth phases, said securities lawyer David Eaton of Kilpatrick Stockton in Atlanta. Eaton added that he expected the extension might have other results, too. "I could see, in the next two years, the SEC evaluating whether the same rules that apply to a large company should apply to these very small ones," he said. "But there's nothing official out there; I don't see ideas floating for what they might do to relieve the burden on small companies. The only burden they've relieved is they've given them more time to comply."
Many business lobbyists have been protesting that Sarbanes-Oxley is too onerous for businesses; the SEC is hardly giving in to that argument, but it's showing a little more flexibility with this extension.