Small, Public, and Under the Gun

Jerry Bremer says that one Twin Cities company with around $70 million in revenue spent $1.2 million over a two-year period to comply with requirements of the Sarbanes-Oxley Act. And that sum doesn’t include the additional fees paid for external audits of the company’s financial statements, says Bremer, managing director of the Minneapolis office of accounting firm CBIZ/Mayer Hoffman McCann, PC. The money went to a consulting firm that helps public companies comply with Section 404 of Sarbanes-Oxley and to other consulting firms “for 404 work related to stock options and income tax disclosures.”

As for the external audits, Sarbanes has added to auditors’ workloads and increased the corresponding cost to companies. Yet, notes Dan Hainlin, a Minnetonka-based tax partner with accounting firm Froehling Anderson: “All you get in the end is an audited financial statement, same as always.”

Since its inception in 2002, and especially since it took effect in 2004 for public companies with more than $75 million in market capitalization, the Sarbanes-Oxley Act has drawn fire from part of the business community as an overreaction by the U.S. Congress to the notorious financial scandals at companies such as Enron, Arthur Andersen, WorldCom, and Global Crossing. Among the legislation’s detractors, the cliché of choice is that it uses a sledgehammer to swat a mosquito.

You'd better be ready to comply, because the cost of noncompliance is too high.

Critics say that the requirements of Sarbanes-Oxley, also known as SOX and as the Investor Protection Act, make it so expensive and cumbersome for public companies to prepare financial statements that the burdens outweigh the reassurance value to shareholders.

Experts in the Twin Cities accounting community say that the jury is still out on whether SOX’s overall benefits justify its costs. But on one point, local accountants are unanimous: The smaller the public company, the heavier the burden of SOX compliance—and the lower the probability that the protection afforded to shareholders will be worth the time and expense.

Long aware of this concern, the Securities Exchange Commission (SEC) has delayed SOX implementation for public companies with less than $75 million in market capitalization. But in May, the commission announced that those smallest public entities—so-called “nonaccelerated” companies—will be required to comply with the legislation, beginning with those whose upcoming fiscal years start on December 16.