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LEGAL ISSUES

Sarbanes-Oxley Takes Toll on Smaller Firms

New reports show that more public companies are reverting to private ownership because of high compliance costs.
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Although designed to target fraud at big corporations, strict accounting rules under the Sarbanes-Oxley Act are imposing disproportionately higher costs on smaller firms, according to a report released Monday by the Government Accountability Office.

In a separate report by the RAND Corporation, also released Monday, researchers said the higher costs had prompted more small public companies to revert to private ownership.

The two reports come just days ahead of a Securities and Exchange Commission meeting where business owners are expected to air longstanding complaints about the act, which was created in 2002 after a series of corporate scandals at Enron, WorldCom, and other major corporations.

The SEC recently extended the deadline for compliance by small public companies until July 15, 2007.

According to the GAO report, public companies with $75 million or less in market capitalization paid a median of $1.14 in audit fees for every $100 in revenue under the act, compared to just 13 cents for every $100 by companies with over $1 billion in market capitalization.

Smaller firms also reported paying between $3,000 and $1.4 million in fees to external consultants, while staff accountants spent as much as 90% of their time on compliance issues.

"Congress passed Sarbanes-Oxley, with my support, to deter criminal behavior by corporations and their accounting firms," Sen. Olympia Snowe (R-Maine), who co-sponsored the GAO report, said in a statement.

Still, the regulations "have the potential to place small business in a paralyzing state of regulatory limbo and damage their ability to create jobs," said Snowe, the chairwoman of the Senate's Committee on Small Business and Entrepreneurship, urging the SEC to implement the act with regard to the size and resources of small public businesses.

One unintended result of the act was a jump in the number of small pubic companies purchased by private firms, according to the RAND Corporation, a non-profit research group based in Santa Monica, Calif.

In the first year of implementation, the propensity of small public companies to be purchased by private firms, which are not subject to the act, increased by 53%, the report said.

The act has also put pressure on small private firms -- those that were poised to go public, and others that are dealing with a shortage of accountants.

"Either it is a sign that Sarbanes-Oxley created a burden on entrepreneurship, inefficiently forcing companies out of the public markets, or alternatively it provided some protection to investors by inducing smaller firms that should never have been public to begin with to abandon that status," Eric Talley, the report's co-author, said in a statement.

Last updated: May 8, 2006




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