Many entrepreneurs argue that IPOs are going overseas because Sarbanes-Oxley compliance costs are too high in the U.S., thus undermining the nation’s economic competitiveness. Yet a first-of-its-kind report offers surprising results of the actual cost of compliance.
The Sarbanes-Oxley Act of 2002 was created in response to a number of significant public registrants issuing financial statements and reports that were grossly misleading.
Basically, SOX is meant to establish standards and requirements for advancing activities associated with corporate governance (ethics, integrity, HR policies/procedures, etc.), company-wide and activity-level internal controls, IT controls over financial reporting and risk assessment. The overall goal of SOX is to improve transparency in financial reporting and advance the accuracy and timeliness of public company disclosures.
For years, we knew it was costing us to spend professional time — i.e., money — to make financials transparent, but we didn’t know how much.
In a new report from consulting firm Lord & Benoit (via Reuters), data for smaller companies reveal that “for non-accelerated filers, the total average first-year cost for management assessment and additional audit fees is $78,474.”
The Lord & Benoit study was based on a cross-section of 29 smaller public companies in the semiconductor, manufacturing, distribution, banking and finance, energy, services and biotech industries. The report also results from an Audit Analytics study of actual audit fees reported by nearly 5,500 public companies, Reuters explains.
Detractors, including many venture capitalists, say that initial public offerings (IPOs) are going overseas because complying with SOX costs is too high. Entrepreneurs claim it is so expensive to gain compliance, that it is not always worth it to go public.
Indeed, Securities and Exchange Commission (SEC) Chairman Christopher Cox last month announced that the SEC “will soon approve a one-year delay of Sarbanes-Oxley Section 404 (b) for the country’s smallest public companies.” The announcement came after repeated calls for a postponement from House Small Business Committee Chairwoman Nydia M. Vel
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Investors may be bewildered by the perception that smaller public companies with multi-million public floats are unable to afford the cost of compliance. History and experience suggest that these smaller companies are particularly susceptible to fraud. Individually, such conduct is unlikely to have the impact of an Enron-type fraud. However, when considered collectively, the cumulative effect is immense—especially to the individual investor who can suffer a devastating loss. While it is reasonable to conclude that investing in smaller companies is intrinsically more risky, it is quite another matter to assume that investors, who assume those risks, are willing to suffer the consequences of fraud, stock manipulation and related behavior. In fact, these behaviors are not risks, but crimes.
for more about this go to Lord & Benoit Report: POST-MORTEM OF SMALL HIGH-TECH PUBLIC COMPANY ACCENTUATES NEED FOR SARBANES-OXLEY COMPLIANCE: Collision of relaxed legislation, executive excess and stormy economy