Firms Still Want SEC to Give Them a Pass
Washington Post Staff Writer
Thursday, April 13, 2006
A government advisory group dominated by executives
representing small businesses yesterday reaffirmed its
intent to ask federal regulators to exempt half of the
country's publicly traded companies from a new
Small businesses have argued that the new legal requirements
are too burdensome and expensive.
The group, the Advisory Committee on Smaller Public
Companies, is set to present a final report making the
request to the Securities and Exchange Commission by April
23, despite widespread criticism its recommendations are too
Among the critics are some institutional investor groups;
consumer groups; and at least two former SEC chairmen:
Arthur Levitt, who served under President Bill Clinton, and
Richard Breeden, who served under President George H. W.
Breeden said in an interview yesterday that the group's
request "lacks merit" because its definition of a small
company is overly broad. "No one forces anyone to be a
public company and take money from investors," Breeden
said. "If a business feels the burdens of being public are
too great, it should consider going private." He and others
point out that a majority of securities frauds involve small
businesses. Failure to curb fraud ultimately will hurt the
ability of all small companies to raise funds by selling
stock, he and others say.
A majority of the five-member Securities and Exchange
Commission, including SEC Chairman Christopher Cox, have
indicated publicly that they won't support an exemption that
goes as far as the advisory group wants.
The rule in question is part of the 2002 Sarbanes-Oxley Act,
which Congress passed to restore investor confidence after
shareholders lost billions of dollars because of accounting
fraud at Enron Corp., WorldCom Inc. and a host of other
Specifically, the rule requires executives of every publicly
traded company to attest that their companies have internal
controls in place to ensure financial statements filed with
the Securities and Exchange Commission are accurate. The
rule also requires that an outside auditor verify the
controls are adequate.
Half the country's public companies, including all large
ones, began complying with the rule with their 2004
financial statements, which were filed with the SEC in early
2005. But the SEC has delayed requiring small companies --
defined as those with publicly traded stock worth $75
million or less, which make up half of all public companies
-- from having to comply with the rule after protests that
the requirement was too onerous.
The advisory group is expected to recommend that companies
with a market capitalization of about $128 million or less
not be required to attest that their internal controls are
adequate. Larger companies would be required to attest to
the adequacy of their controls but would not be required to
have an auditor sign off on them.
Critics of an exemption say they favor simplifying
regulations for genuinely small companies. And many critics
agree that auditing firms have made compliance with the rule
unnecessarily costly. But they argue wholesale exemption is
a bad idea.
Many critics also dispute the SEC's legal ability to invoke
an exemption. The law's namesakes disagree on that. Rep.
Michael G. Oxley (R-Ohio) -- who fought major portions of
the legislation, putting his name on it only when it was
clear it would pass anyway -- says the SEC has the
authority. Sen. Paul S. Sarbanes (D-Md.), the engine behind
the legislation, cites legal scholars who say it does not,
though he has said the law allows the agency to make
adjustments for small firms.
At least two council members had harsh words for those who
oppose their recommendations. James A. "Drew" Connolly III,
a professional investor who also founded the CEO Council, an
organization of executives of smaller public companies,
called opponents' arguments "half-baked." Richard M. Jaffee,
chairman of Oil-Dri Corp., which has publicly traded stock
worth $75 million and makes cat litter and other products,
said most critics lacked the business experience of those
Consumer groups disagree, saying small business is overly
represented on the council and consumers not enough.
Breeden has said that the cost of complying with
Sarbanes-Oxley "is less than 1 percent" of the cost of
executive pay packages at many companies. "If businesses
are having a hard time making ends meet, maybe they should
start with look to reducing their compensation expenses," he