When the Final Report of the Advisory Committee On Smaller Public Companies (the "Report"),* under the chairmanship of Herb Wander was received by the Commission in April 2006, it was anticipated that the Commission might continue to exempt small cap and micro-cap companies from obligations to comply with Section 404. However, Chairman Cox quickly disabused the profession of that notion. Alternatively, he has made several speeches, indicating that the Commission would tweak the issuer's responsibilities under 404 so that excessive accounting costs are not required. How effective that will be in reducing the burdens of Sarbanes-Oxley and particularly Section 404, remains to be seen. Excerpts from the Advisory Committee's report on the significance of Sarbanes-Oxley expense particularly on smaller companies include the following data:
"Studies into the consequences of Section 404 indicate that actual average costs of Section 404 compliance have in fact been far in excess of what was originally anticipated. In addition, although costs generally decline following the first year of implementation, a recent study commissioned by the Big Four accounting firms acknowledges that second year totals costs for public companies with a market capitalization between $75 million and $700 million will still equal, on average, approximately $900,000.
"Some argue that internal control over financial reporting should be beneficial to smaller public companies because it will make it easier for them to attract capital. At this point in the development of the internal control requirements, we think the evidence is quite mixed on this question and, if anything, is tending in the opposite direction. A number of data points lead us in this direction, but we recognize that the evidence has not been fully analyzed and it may be premature to make any conclusions. Nevertheless, the following developments should be carefully monitored.
*The entire Report can be accessed by http://www.sec.gov/info/smallbus/acspc/acspc-finalreport.pdf