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Compliance: Sarbox Hits Small Companies Hardest
A recent SEC study found what small companies have known for some time: the cost for small companies to comply with Sarbox is disproportionately higher than the cost for larger companies. The report said that “although larger companies incur higher compliance costs, smaller companies incur higher scaled costs (i.e., relative to their assets) on average.” Smaller companies are defined as public companies with a market cap below $75 million.
The purpose of the SEC report is partly to address small business concerns that the cost of Sarbox compliance is too onerous with the costs far outweighing any potential benefits. The report tries to describe the direct benefits of Sarbox such as improved financial reporting and indirect benefits like being better able to raise capital.
But the SEC was not entirely successful in demonstrating the benefits. For example, it found that only 40% of people have a higher opinion or greater confidence in a company’s financial reports that is Sarbox-compliant, and Sarbox compliance seems to have had no influence on investor confidence in the company’s financial reporting.
The SEC report broke down the costs related to compliance and found that the highest cost in achieving compliance is due to “internal labor costs”. The next highest expense is related to audit fees. This finding was contrary to most people’s expectations. Most people had assumed that the most costly piece to compliance is the audit.
The mean total for the first year of compliance at a company is $2.87 million. That number drops to $2.03 million in the second year, and the SEC reports that over time, compliance costs shrink for a company. The report also noted that after the SEC issued more concrete language to define what is required to achieve Sarbox compliance, across-the-board compliance costs for companies dropped.
