Big news from Washington: it appears that small companies are going to become exempt from SOX 404(b).
Section 404(b) of Sarbanes Oxley would require the typically lone officer-director of a start-up or shell company to create a system of internal controls over financial reporting. Business people familiar with start-up and shell companies know that such companies are unable to have proper internal controls because they cannot segregate accounting duties between employees (because there are no employees) and management cannot be stopped from overriding whatever controls were put in place, tested, monitored and reported on annually.
Nevertheless, Sarbanes-Oxley as passed in 2002 requires start-up and shell companies to create, implement, monitor and report on such a system of internal control over financial reporting, and to pay their auditor to annually audit their new report on internal controls. Proponents of the provision believe it will reduce fraud, protect investors and increase revenue for auditors and IC consultants.
Economists, business people and some lawmakers publically noted that the new requirements would not benefit anyone, as investment or lending decisions are not made based on the financial statements of start-up and shell companies in the first place, and the requirements would be very burdensome and expensive.
So the SEC issued a series of temporary reprieves for most of the last decade.
The SEC’s final rule had the requirements going into effect for small companies with years ending on or after June 15, 2010.
Earlier this year, Congress passed a law that would permanently exempt small businesses from SOX 404(b), but the US Senate did not include such a provision in its version of the bill. With two different versions of the bill passed by each house, a “conference committee” was formed to try to get the two sides together.
Wednesday, the conference committee agreed to move forward with the house version, which does exempt small companies from SOX 404(b). Two Democratic senators, Tim Johnson of South Dakota and Blanche Lincoln of Arkansas, voted with the Republican minority over the objections of Christopher Dodd, chairman of the Senate Banking Committee. The vote was 7-5.
From here, both full houses will have to vote on the “middle-ground” bill. If it passes, the bill will be on to the President for final enactment.
