SOX Is Wearing Everyone

The Securities and Exchange Commission (SEC) will continue to require small public companies (whose market value is less than $128 million) to comply with the Sarbanes-Oxley Act and companies valued between $128 and $700 million to continue having their internal controls audited. Last December an advisory group endorsed eliminating these requirements because of their high cost. The SEC appears to be steering a middle course as it looks for ways to cut the cost of compliance while still requiring all public companies to comply.

The decision keeps these smaller companies on the hook for demonstrating that their financial statements and external reporting systems are controlled. No doubt, compliance requirements will deter many smaller companies from going public (which may not be a bad thing, by the way). For those already public, the cost of compliance is pure overhead and therefore provides an incentive to merge or go private. However, most of these companies are stuck: They will be unable to raise the funds to go private or find a suitable merger partner at a suitable price.

Ventana Research thinks it is even more important for smaller public companies to look for ways to address the root causes of inefficiencies in their finance processes (for example, manual systems, undocumented processes or excessive use of spreadsheets). In our experience, addressing such issues is likely to enhance a company's financial control structure and reduce the cost of Sarbanes-Oxley compliance.

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