March 16, 2006
The Advisory Committee on Smaller Public Companies proposal to reduce SOX compliance based on market cap is short sighted. As an auditor, I believe that the proposed change is not in the best interest of those who must rely upon the financial statements of any size public company.
1. If a small cap company needs a respite from SOX, they can de-list or go dark.
2. Many CEOs have complained that they need SOX freedom so their companies can grow. If I am correct, there are no provisions in SOX which block growth.
3. Why do small companies need to appeal to "blind" investors to foster capitalization? Sounds like the banks dont have faith, so why should anyone else.
4. In the past, I never believed any small cap financial statements, because I felt as a class, those companies did not have adequate controls in place. Given a fighting chance, SOX can fix this issue.
5. The common rejoiner is: Cost of SOX compliance is too high. Other than the CEOs bonus, who is hurt? By the way, my surgeon also follows a strict control protocol. Perhaps if we relax his controls, I will get a break on my medical bill.
6. Some say SOX compliance costs have lowered profits which in turn hurts the investor. How much will it hurt investors if they lose money due to incorrect financial statements?
7. In real life I have audited small companies without controls. They ultimately have expensive issues related to control failures and leave their stockholders holding the bag.
8. Most stockholders are not necessarily individual investors, but institutions managing retirement assets or offering wealth protection services. Arent these stockholders entitled to fair and accurate statements?
I feel that the committees recommendation is not in the best interest of the investing public. Please do not excuse small caps as they have other options if they want reduced regulation.