August 4, 2006
We began trading on the Amex in December 2005. We currently have a market cap of approximately $84,000,000. As the CFO and GC of a small public company, given the added cost and burdens of Sarbanes-Oxley compliance, I frankly wonder about the benefits of being a public company. Its my opinion that many companies that would have gone public in the past should consider staying private. In my opinion the benefits of the liquidity provided by being publicly traded and valuations placed on many small public companies does not justify the additional burdens and costs associated with SOX (especially in light of the valuations placed on and liquidity opportunities provided private companies by private equity funds). That said the biggest problems we face as a result of Sarbanes-Oxley:
1. It is extremely difficult to find auditors willing to take on the risk of auditing a newer public company (at least at a reasonable audit fee). SOX puts us in a position where we have to virtually take whatever auditor we can find at whatever price they want to charge.
2. While its true that many smaller public companies may be most at risk for internal control deficiencies, it is also true that these smaller public companies (e.g.., those with less than $75 million in revenue or $750 million in market cap) are least able to afford the additional costs. The available dollars are often scarce and every dollar spent on SOX is a dollar not spent on furthering the business prospects of the company. The perverse effect of this is that it hurts the very investors SOX is theoretically supposed to help. Would a typical investor benefit more from another dollar spent on more internal controls or a dollar spent on product development?
3. It is difficult for smaller public companies to attract qualified directors because of their concern over the additional responsibilities imposed on them (and concern over being sued).
Here are some suggestions:
1. Define Smaller Public Company as a company with less than either (i) $75 million in revenues or (ii) $750 million in market cap. These Smaller Public Companies should be the focus of relief. I think its ridiculous that the standards for being classified as an accelerated filer and subject to the full SOX requirements are so low (perhaps the requirements for an accelerated filer should be the same as those for a well seasoned issuer). After all, investors in smaller public companies know (or should know) by definition that these companies are usually riskier earlier stage companies with less well developed internal control environments.
2. Phase in the five main COSO components over five years, so a Smaller Public Company has five years to fully phase in all the COSO components (one component adopted each year).
3. The standard to focus on for attestation purposes (and for purposes of issuing an adverse opinion) should be either an internal control deficiency that has (i) previously been identified as in existence as of the immediately preceding year end and the Smaller Public Company has failed to address the deficiency or (ii) actually resulted in a material audit adjustment that the smaller public company has declined to record on their books..
4. Specify a minimum set of internal controls (allowing for different controls based on the type of business/industry in which the Smaller Public Company is engaged) that establish a safe harbor for Smaller Public Companies (for purposes of the CFO/CEO certifications and attestation purposes).
In my opinion, without some relief the public markets in the U.S. will soon find they are not able to attract the next generation of public companies. The ability of small companies to raise capital in the public marketplace will be stifled and in the end entrepreneurship, job creation, the economy and the public suffers.
George J. Zilich
CFO General Counsel
BPI Energy, Inc.