When it comes to the Sarbanes-Oxley Act, one thing is clear: Smaller businesses will be hit by more of its provisions fairly soon.
What's not so clear is exactly what they're going to be hit with, or when.
Earlier this year the Securities and Exchange Commission launched a study of the compliance costs of the Sarbanes-Oxley Act for small public companies, or those with a public float of $75 million or less. The result of that study, expected in late summer or early fall, should clarify what the smaller companies must do.
"A lot of the (small public firms) are holding their breath waiting on the SEC's determination of ultimate compliance requirements," said Justin Hendrickson, a consultant specializing in Sarbanes-Oxley, which is often called Sarbox or Sox, for Grant Thornton LLP in Los Angeles.
Sarbox, passed in 2002 to head off accounting scandals in the post-Enron era, has been widely criticized by companies as cumbersome and costly. Among the most expensive tasks is Section 404, the requirement that public firms evaluate their internal controls and then in a separate procedure have external auditors sign off on them.
The SEC presumably is looking at ways to ease the regulatory burden of 404 on smaller companies. The commission has proposed an extension of the deadline for smaller companies to submit their internal controls to an outside audit from the end of this fiscal year to December 2009. The decision will be announced when the study is released later this year.
Regardless of the outcome of the study, there'll likely be work for the consultants.
When the SEC completes its study, Hendrickson anticipates more small public companies will have to contract consultants to help reduce the costs of compliance.
Indeed, Los Angeles consulting firm Sox Solutions Inc. is seeing more business than ever from midsize and small companies.
"Public companies along with their external auditors are still trying to figure out the best way to implement the audit standards of Sarbanes-Oxley to alleviate unnecessary audit work," said Sonia Luna, chief executive of Sox Solutions.
Specializing in Sarbox compliance for small and midsize companies, Luna's business has grown considerably since she launched the boutique consulting firm in 2004.
One local company struggling to figure out how to comply with Sarbox is Platinum Studios Inc., a Los Angeles entertainment company that registered a block of shares on the over-the-counter bulletin board in February.
Platinum Studios now has one year to get its accounting system up to speed with most of the requirements of Sarbox.
With about $5 million in annual sales and a tiny accounting department of only three employees, two full time and one part time, Platinum executives expect that they will need to double or triple their accounting staff to comply with Sarbox.
Add to that the cost of hiring a consultant to figure out what the law actually means.
"This is one of the drawbacks of being a public company," said Brian Altounian, chief operating officer of Platinum Studios. "Because of the confusing and convoluted rules, you have to rely on consultants to put the documents together."
Many of the original Sarbox rules turned out to cost much more than originally projected. For example, auditing the internal controls at all branches of a business is sometimes not cost-effective, so companies are increasingly concentrating their efforts on high-risk satellite locations.
Last year, the SEC issued guidelines offering management more flexibility. The new rules are expected to help companies avoid much of the cost and confusion from the early days of the law.
"Initially the entire auditing community was overauditing for Sarbanes-Oxley because the level of effort required to comply with the law was not clear," Luna said.
Recent statements by SEC Chairman Christopher Cox indicate growing awareness by the commission of the regulatory burden of the law for small companies.
"The study will give us the opportunity to ensure that the investor protections of Section 404 do not impose unnecessary or disproportionate burdens on smaller companies," Cox said in a statement.
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