Bill Exempts Small Businesses from Sarbanes-Oxley

Nov 10, 2009

On Nov. 4, the House Financial Services Committee voted along party lines and passed out of committee the Investor Protection Act of 2009 (H.R. 3817). Included in the language was an amendment that passed 37-32 which would permanently exempt businesses valued at $75 million or less from a Sarbanes-Oxley requirement that auditors attest to management's declaration that a concern's internal controls over financial reporting are in order.

H.R. 3817 was sponsored by Rep. Paul Kanjorski (D-Pa.) and reforms the Securities and Exchange Commission (SEC) to strengthen its powers, better protect investors, and efficiently and effectively regulate the securities markets. The measure doubles the authorized funding for the SEC over the next five years and provides dozens of new enforcement powers and regulatory authorities. Thus, the goal is to enahnce SEC's enforcement ablility to better protect investors and police the markets.

The clause on Sarbanes-Oxley was inserted as a bipartisan amendment to the more broad-reaching bill. The amendment, offered by Reps. Scott Garrett (R-N.J.) and John Alder (D-N.J.), exempts small businesses from the internal control audit attestation reporting requirements contained in Section 404(b) of the Sarbanes-Oxley Act. The amendment language mirrors legislation Rep. Garrett introduced earlier this year, the Small Business SOX Compliance Relief Act (HR 3775.)

The Garrett/Adler amendment would not only exempt small businesses, but would require the SEC, together with the Government Accountability Office (GAO), to conduct a study directed at reducing the burden of Sarbanes-Oxley 404(b) on companies with market cap between $75 million and $250 million. Additionally, the amendment calls for the study to "consider whether reducing the compliance burden or a complete exemption for these companies will encourage them to list on exchanges in the U.S. in their initial public offerings."

Although the stated intent of Sarbanes-Oxley was to provide investor confidence in the financial markets through greater accountability and disclosure, the Act has had the unintended effect of creating undue and often unbearable burdens on small businesses. According to Rep. Garrett, there is a place for federal oversight, but the weighty cost of compliance under Section 404(b) is slowly strangling 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.

The SEC has repeatedly extended the deadline for non-accelerated filers to begin providing audited assessments of their internal controls over financial reporting--an acknowledgment of continued concern about compliance costs. Although reforms were made in 2007 to loosen the guidelines for smaller companies, businesses of all sizes still report excessive compliance costs, as noted in an SEC report from Sept. 2009. In summarizing survey responses from businesses regarding the benefits of Section 404(b) compliance, the SEC said that a majority felt that the costs of compliance outweighed the benefits. This was especially true among smaller companies.

Sarbanes-Oxley was passed in 2002, but small businesses have been exempted by the SEC from its Section 404(b) attestation requirement ever since; the exemption was scheduled to be lifted in 2011.

The ultimate outcome of the Garrett/Adler amendment will depend on whether it remains in H.R. 3817 when voted on by the full House of Representatives, and whether it will be included in the Senate’s version of the bill and ultimately signed into law.