Garrett Fighting to Keep Costs Down for Small Businesses
Washington,
Oct 28, 2009 -
Today in the Financial Services Committee, as we are marking up the Investor Protection Act of 2009, I plan to introduce an amendment to extend the exemption for small businesses from the burdensome costs found within Section 404b the Sarbanes-Oxley (SOX) Act of 2002.
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. Honest companies are being punished and the U.S. economy will suffer as a result. Especially now, as our country struggles to emerge from a recession, the last thing American small businesses need is another barrier to economic stabilization. I am pleased to offer this amendment with Rep. Carolyn Maloney (D-NY). Our amendment would free small businesses from onerous regulations and allow them to return their focus and their resources to creating jobs for unemployed Americans and innovating for our economy.
The Securities and Exchange Commission (SEC) has repeatedly extended the deadline for small businesses to begin providing audited assessments of their internal controls over financial reporting, an acknowledgement of continued concern about compliance costs. Although reforms were made in 2007 to relax the guidelines for smaller companies, businesses of all sizes still report excessive compliance costs, as noted in an SEC report from September 2009. In summarizing survey responses from businesses regarding the benefits of Section 404 compliance, the SEC wrote, “[A] majority felt that the costs of compliance outweighed the benefits. This was especially true among smaller companies.”
The extra requirements of Section 404 increase costs to small companies significantly. Section 404 adds external consulting costs, including legal fees, and substantially increases the audit and attestation fees for these companies. Research by NASDAQ shows that the burden of compliance, on a percentage of revenue basis, is 11 times greater for small companies. This creates an unfair competitive advantage for larger companies.
In addition to having an effect on individual businesses, SOX Section 404 may have a dramatic 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. Additionally, Section 404 requirements may cause foreign companies to delist from U.S. exchanges. Among SEC survey respondents, 77 percent of small foreign firms considered delisting.
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. There is a place for Federal oversight, but the weighty cost of compliance under Section 404 is slowly strangling small businesses. I believe the amendment 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.
