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The Small Business SOX Compliance Relief Act was introduced in the U.S. House of Representatives Oct. 8 to permanently exempt small businesses from Section 404(b) of the Sarbanes-Oxley Act of 2002. Section 404 contains internal reporting requirements that many small businesses complain are costly and time consuming to implement.
In an acknowledgment of continued concern about compliance costs, the Securities and Exchange Commission has repeatedly extended the deadline for small business filers to begin providing audited assessments of their internal controls over financial reporting. According to a September SEC report, despite reforms made in 2007 to relax the guidelines for smaller companies, businesses of all sizes still report excessive compliance costs.
In the report, the SEC wrote, “[A] majority felt that the costs of compliance outweighed the benefits. This was especially true among smaller companies.”
Rep. Scott Garrett, R-N.J., sponsor of the legislation, said in a statement: “Although the stated intent of Sarbanes-Oxley was to provide investor confidence in our markets through greater accountability and disclosure, the Act has had the unintended effect of creating undue-and often unbearable-burdens on small businesses. It is diverting valuable resources away from other legitimate business needs; creating massive and tedious documentation requirements; and discouraging the public listing of both international and domestic companies on U.S. markets.”
According to Garrett, in addition to having an effect on individual businesses, Section 404 may have an effect on the competitiveness of U.S. capital markets, as the high cost of compliance has the potential to cause public companies to go private, or prevent private companies from going public. Of the small companies surveyed by the SEC, 70 percent reported they had considered going private to avoid subjecting themselves to Section 404 requirements.
“When businesses have been conducting their affairs within the confines of pre-SOX law and acting with integrity, it is reflected in the trust of their shareholders and the strength of the market,” said Garrett. “There is a place for federal oversight, but the weighty cost of compliance under Section 404 is slowly strangling small businesses. I believe my legislation will lessen the burden Section 404 unnecessarily imposes on U.S. small businesses, while continuing to bolster confidence in the integrity of publicly held companies.”