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Tuesday, April 26, 2005

SOxing It To Small Businesses (From TCS)

I firmly believe that the total effects of Sarbanes Oxley won't be known for quite a few years. We seem to hear new stories and articles daily on how it's caused big enough headaches for public firms that many are considering going private (and causing others to delay going public). Well, here's some more:

In his Tech central column SOXing It To Small Businesses, Steve Bainbridge details some of the costs associated with section 404, which mandates that firms include disclosures of their firms' internal controls in their annual reports. He writes:

Study after study confirms that Section 404 has imposed huge costs on American business:

  • By one estimate, some companies will incur 20,000 staff hours to comply with Section 404, something the SEC estimated would take only 383 staff hours.
  • A Financial Executives International survey of 321 companies found that firms with greater than $5 billion in revenues spend an average of $4.7 million per year just to implement SOX section 404.
  • A survey by Foley & Lardner found that the average cost of being public for a company with annual revenue under $1 billion increased by $1.6 million -- 130% -- after SOC went into force.
He also notes that the burden of increased SOX-related costs are borne disproportionally by small firms:

Finally, the Foley & Lardner study found that these costs are disproportionately borne by smaller public firms. That finding is confirmed by data from a study by three University of Georgia economists, who found that post-SOX director compensation increases have been much worse at small firms:

There is also strong evidence that SOX has imposed disproportionate burdens on small firms. For example, small firms paid $5.91 to non-employee directors on every $1,000 in sales in the pre-SOX period, which increased to $9.76 on every $1000 in sales in the post-SOX period. In contrast, large firms incurred 13 cents in director cash compensation per $1,000 in sales in the Pre-SOX period, which increased only to 15 cents in the Post-SOX period.

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