SEC declines to relax Sarbanes-Oxley rules
Smaller publicly traded companies such as West Warwick’s Astro-Med Inc. make up just a fraction of the corporate wealth in the United States, whereas giants such as Bank of America represent the majority of total market value.
Beyond Cash Donations: How New Forms of Giving Are Transforming Not-for-Profit Accounting
Evolving Funding Landscape for Not-for-Profits Not-for-profit organizations are being asked to do more with less,…
Learn More
But regardless of a company’s size or impact on the stock market, the U.S. Securities and Exchange Commission wants even the tiniest corporations to have the same level of financial controls in place – meaning that Astro-Med can expect to be paying significant fees to its accountants.
The SEC on May 17 announced that it had denied a proposal from its Advisory Committee on Smaller Public Companies, which asked the regulator in April to spare companies with market values less than $128.2 million from costly internal-control procedures mandated in the Sarbanes-Oxley Act of 2002.
Along with the denial, however, the SEC said it would provide managers with guidance to assist them with the time-consuming controls. It also gave companies with market float of less than $75 million until next year to put the controls in place.
Albert W. Ondis, CEO and chairman of Astro-Med, said the commission’s guidance makes him “somewhat” optimistic about the act’s future impact on his company, which designs and produces data analysis and storage systems and has a market capitalization of about $60 million.
“The comment they made about how the rules would be interpreted as well as the instructions that they plan to give the accounting firms … we thought to be encouraging,” said Ondis, who expects the guidance to reduce some of the regulatory burdens that the act has caused.
“I just don’t think that the SEC is going to run the risk of driving smaller-capitalization companies to the brink of ruin,” the CEO added.
Astro-Med has raised its annual budget for accounting and auditing fees by about 50 percent since 2004. Ondis said small companies should be held to the same accounting standards as large corporations, but smaller outfits’ simpler corporate structures don’t warrant the same percentage increases in accounting fees.
A study released last June by national law firm Foley & Lardner noted that Sarbanes-Oxley has had a more drastic economic impact on public companies with revenue under $1 billion in terms of lost productivity than those with revenue above that level.
The law firm found that those companies saw the cost of lost productivity skyrocket 556 percent to $1 million in fiscal year 2004, compared with an 18-percent jump to $2.9 million at corporations with more than $1 billion in annual revenue.
With more companies required to implement internal controls, U.S. corporations are expected to spend $6 billion to comply with the act this year, according to AMR Research, a Boston-based financial research group. Yet due to lower internal accounting costs, that amount is about equal to the 2005 tally.
Many people credit the enhanced oversight from Sarbanes-Oxley for improving investor confidence. Yet what began as legislation passed in reaction to financial frauds at large companies such as Enron Corp. and Tyco International is having a growing effect on smaller companies, noted Edward M. Mazze, dean of the College of Business at the University of Rhode Island.
With the act holding top executives and board members personally responsible for the accuracy of financial reports, said Mazze, small companies can no longer afford to have laypeople serve as directors. Small companies need boards with financially literate people, who command higher pay.
Mazze, a corporate governance expert, serves on boards of directors at public companies Washington Trust Bancorp in Westerly and a Philadelphia-based electronic components maker called Technitrol Inc. He is also on the boards of two private firms.
Before the act took effect in 2003, Mazze said, he and fellow directors would meet for two hours, four times per year to review financial materials. Now they meet for four hours, eight to 12 times per year, due to the reams of documentation they must study.
“So I’m spending a lot more time and reading a lot more materials,” he added.
Mazze said smaller companies also face the challenge of retaining the services of an accounting firm with experience in dealing with SEC rules. Much of that experience exists in Big Four accounting firms, which have had to shed some smaller clients to deal with the deluge of Sarbanes-Oxley related work at larger companies.
KPMG, the only Big Four firm in Providence, refused to comment on the impact of the act on smaller client companies in Rhode Island and nearby parts of Massachusetts.
Meanwhile, smaller accounting outfits in the city and nationwide are growing rapidly by taking on corporate clients either unable or not wanting to retain a Big Four firm. That has pressured some smaller firms to include services related to Sarbanes-Oxley.
“That’s what’s happened with our business,” said Edmund A. Restivo Jr., managing partner at Restivo Monacelli in Providence.
Restivo said his firm hired a senior tax manager from PricewaterhouseCoopers two years ago to get work from public companies dealing with the act. The firm has since picked up six public companies in Massachusetts as clients. Also, the firm has grown from 18 to 36 accountants since the act’s passage.
Sarbanes-Oxley required Enron to spend $27 million on an internal audit, Restivo noted. “What [the act] has done is create a $30 billion industry.”
