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Small Cap Companies Get Reprieve on Compliance With Sarbanes-Oxley

Federal regulators are giving small public companies another extension to comply with one of the more costly provisions of the Sarbanes-Oxley law.

The Securities and Exchange Commission on Aug. 9 said smaller public firms , those with market capitalizations of less than $75 million , would get another year to comply with a provision calling for public companies to document and test their internal controls.

“This gives us a full additional year for certification,” said Pat Gray, the senior vice president of finance at Axesstel Inc., a maker of wireless phones. Gray said his firm previously was shooting to comply with the law’s internal control requirements by the end of 2007, but now has until the end of 2008.

Gray couldn’t say how much the additional work would cost, but it “will increase costs for sure.”

Congress passed the Sarbanes-Oxley Act of 2002 in response to major accounting scandals such as Enron and WorldCom. One section, Section 404, requires companies to document controls, and then have an outside auditor determine whether the controls are effective.


Doubling The Cost

Some smaller companies said the increased regulatory reporting was doubling their auditing costs.

Gray said Axesstel spent $324,000 on auditing work in 2005, but he said he had not spent much related to compliance with Sarbanes-Oxley this year.

The company plans to hire a consulting firm to help with the process, and likely use its regular auditor to test the systems.

In addition to providing an extension to smaller companies, the SEC granted an extension to new public companies (those going public in 2006 and 2007), and to smaller foreign companies (those with market capitalizations of less than $700 million) that trade on U.S. stock exchanges. The rulings should be effective next month.


Responding To Complaints

Richard Kalenka, managing partner for PricewaterhouseCoopers’ San Diego office, said the SEC was responding to complaints from smaller companies about increased expenses for auditing and to ensure the increased reporting provisions don’t deter smaller companies from entering public markets.

The costs to comply with Section 404 have been high for many smaller firms because they often didn’t have all their internal controls documented, Kalenka said.

“For many public companies, it was a completely bottom-up approach that required them to identify the controls, sometimes remediate these controls, document the controls, and then attest the controls,” he said.

Ed Lake, the chief financial officer for SYS Technologies Inc., a San Diego-based provider of technology services to federal defense agencies, said he welcomed the SEC ruling because it gives him more time to meet some of the more costly provisions of the law.

While SYS has yet to incur significant costs complying with the 404 provisions, the firm did hire an outside consultant and has spent less than $100,000, he said.

Lake said his auditing costs would most likely increase from $200,000 to $500,000.

A recent report from Milwaukee law firm Foley & Lardner LLP found that between 2003 and 2005, small companies , with market capitalizations from $300 million to $1 billion , were spending $786,000 on auditing.

Although smaller companies were seeing higher auditing fees because of Sarbanes-Oxley, some accountants feel the reforms have been good for business.

“Sarbanes-Oxley has had some beneficial effect on all companies because of the heightened awareness of internal controls and a heightened awareness of ethics in business,” said Dana Basney, shareholder in the local accounting firm of Mayer Hoffman McCann PC.

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