SEC: Small Companies Not Exempt From Law

May 18, 2006

Associated Press

The Securities and Exchange Commission said Wednesday that it has decided not to exempt smaller public companies from a key requirement of a 2002 anti-fraud law, resisting entreaties from business interests that have been complaining about the costs of compliance.In a statement, the SEC said it will take a series of actions meant to improve the way the law works, "although ultimately all public companies will be required to comply."

At issue is a key part of the Sarbanes-Oxley law that arose from the 2002 corporate scandals: the requirement for companies to file reports on the strength of their internal financial controls and fix any problems. An advisory committee appointed by the SEC formally proposed last month that the agency exempt smaller companies from the requirement - a move that would affect about 70 percent of all public companies in the United States.

The planned actions announced by the SEC, including providing guidance to companies on complying with the law, "are designed to further improve the reliability of financial statements and to better protect investors" while making the regulatory process more efficient and cost effective, SEC Chairman Christopher Cox said in a statement. "As we go forward, we will consider the special concerns of all companies that fall under our jurisdiction - large and small, foreign and domestic."

The Public Company Accounting Oversight Board, which supervises the accounting industry, issued a similar statement Wednesday.

"During the past year, we have heard nearly unanimous agreement that effective controls of a public company's system of financial reporting protect investors," said Bill Gradison, the board's acting chairman. "We have also heard, however, that some refinements to the existing requirements would reduce the costs associated with internal-control reporting while maintaining the benefits to investors."

At the SEC, the five-member commission will vote at some point in the future to propose rules putting its plan into effect.

The SEC "currently anticipates that it will issue guidance to management to assist in its performance of a top-down, risk-based assessment of internal control over financial reporting," the agency said in its statement. "To ensure that this guidance is of help to ... smaller public companies, the (SEC) intends that this future guidance will be scalable and responsive to their individual circumstances."

That would allow companies to take a broad approach to the requirement, focusing on the parts of their business that present the biggest potential financial risk.

A report by congressional auditors released last week found that the costs for public companies to comply with the Sarbanes-Oxley law have been higher than anticipated. At the same time, though, the report by the Government Accountability Office raised concerns about the recommendations of the official advisory committee for exemptions from the law for smaller companies. The scope of the proposed exemptions could damage the investor protection afforded by the anti-fraud law, according to the report.

Several lawmakers, meanwhile, formally proposed legislation Wednesday that would exempt companies with a market value of less than $700 million from complying with the law's requirement.

Copyright 2006 Associated Press

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