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Compliance: SEC Relaxes Sarbanes-Oxley for Smaller Companies

By Dick Weisinger

Much of the core of Sarbanes-Oxley regulations and the philosophy that drove it into being is about good business.  Sarbanes-Oxley is a call to businesses to strengthen their attention on internal control.  But that’s not to say that Sarbanes-Oxley is without its problems.

The crux of the problem voiced by many small and mid-size companies about the Sarbanes-Oxley regulation has been its vagueness of language coupled with the requirement for companies to bring in an external auditor.  Bringing in an outside auditor adds significant costs.  And many auditors took on their assignments using the most risk-adverse interpretation of Sarbanes-Oxley, resulting in requests for extremely granular and detailed reporting.  The results were very high costs, sometimes resulting in accounting costs that were double or more than what companies were paying for accounting services prior to Sarbanes-Oxley.

On Wednesday, the SEC proposed changes relax the Sarbane-Oxley regulation first enacted in 2002 due to complaints from many companies citing the law as being too burdensome and costly.  The proposals are now up for public comment, and in the hours since the announcement, most initial comments seem to be quite favorable.

A major proposed change in the law is that an external auditor would no longer be needed.  The SEC noted that because the accounting needs of smaller companies were often considerably less complex than larger ones that they would allow the regulation to “scale and tailor” to the business.

If enacted, the new rules would reduce the requirement for testing internal controls and providing documentation for companies with a market value between $75 million and $700 million.

The net is that many mid-size companies should be able to reduce their accounting costs considerably by not needing to bring in outside accountants to certify their compliance.  Other than for the accountants, that may be good news. But removing the redundant check made by an external auditor doesn’t remove the requirement for companies to keep a close tab on their internal controls.  Compliance doesn’t go away, just some of the duplicated costs.

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