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Sarbanes-Oxley Section 404: The Section of Unintended Consequences and its Impact on Small Business

Sarbanes-Oxley Section 404: The Section of Unintended Consequences and its Impact on Small Business

by Rick Turoczy on February 10, 2005

AeA, the Nation’s largest high-tech trade association, today released its report titled Sarbanes-Oxley Section 404: The ‘Section’ of Unintended Consequences and its Impact on Small Business. The report was formulated by AeA member company CFOs and senior executives from its 18 councils throughout the United States. While it is highly complementary of Sarbanes-Oxley and its effectiveness on corporate governance, the report is critical of Section 404, which requires extensive new internal controls for financial reporting. AeA states that section 404 is having a devastating impact on small- and medium-sized companies and many of the objectives of the legislation’s authors will not be realized.

Sarbanes-Oxley Section 404: The ‘Section’ of Unintended Consequences and its Impact on Small Business presents the major problems with Section 404 and makes recommendations to the Securities and Exchange Commission (SEC), the Public Company Accounting Oversight Board (PCAOB), and Congress to take action and improve implementation. The report is not asking for legislative changes. Rather, it recommends modifications to the guidance that has been provided, the regulations implementing Section 404, and the interpretation of same by the auditing firms.

In referring to Section 404, William T. Archey, President and CEO of AeA said, “This is the quintessential example of the law of unintended consequences, and Section 404 of Sarbanes-Oxley is not meeting its objectives. It has been an unnecessary burden for small- and medium-sized companies throughout the United States, and while section 404 is well intentioned, the tremendous increase in cost to smaller companies is out of control. At the same time, many of the requirements being imposed will not help prevent corporate fraud. Our mission is simple: We are trying to improve implementation of Section 404 through the regulatory process; not roll back Sarbanes-Oxley. There was unanimous agreement among AeA’s Committee that Sarbanes-Oxley, with the exception of Section 404, is improving corporate governance in a cost effective way.”

“When Congress passed the Sarbanes-Oxley Act, the SEC estimated the cost of implementing these regulations would be less that $1.5 billion,” said Alex Davern, Chairman of AeA’s Sarbanes-Oxley Advisory Committee and Chief Financial Officer of National Instruments Corporation (Nasdaq:NATI – News). “The true cost will be close to $35 billion for the first year. Smaller companies neither require, nor can they afford, the same level of investment in internal controls as larger companies. Implementation of Section 404 needs to be reevaluated and modified to prevent permanent damage to the small- and medium-sized businesses that are the job growth engine of the U.S. economy. Without change, the objectives of Section 404, to impose effective internal controls to help prevent fraud, will not be realized. The SEC and the PCAOB must act now, and Congress needs to exert its oversight authority by holding hearings on this issue immediately.”

Sarbanes-Oxley Section 404: The Section of Unintended Consequences and its Impact on Small Business

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Anonymous March 1, 2005 at 4:39 pm

As one of the smaller but rapidly growing companies, we intended to launch an IPO. We are being told that the 404 could be 2 to 3 times the cost as our audits. It appears to require another 2 or 3 staff members. With no guidelines, nor checklist, a “Quality Control” program has no mission nor will it know when the objective has been accomplished. We have decided not to be public, but being private stymies our fast growth and leaves us as a small employer. Imagine an aircraft mfg’r, or the auto industry being told to comply with an unknown. Its impossible.
thanks

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