From: Dee Ann Johnson
Securities and Exchange Commission
Accolades to the Advisory Committee for moving in the right direction. Under proposed guidance, “small-cap” companies would be exempt from the external audit requirements of Section 404 compliance under certain conditions, including annual revenues of less than $250 million. The magnitude of revenues, however, does not necessarily correlate with risk; accordingly, the revenue threshold should be excluded when determining a company’s §404 compliance requirements. It would also be difficult to find many companies that would benefit from the proposed guidance, as written, since the majority of companies with market caps between $128 million to $787 million would likely have revenues in excess of $250 million.
Additionally, despite the level of revenues, many companies, including Ampco, operate in highly-competitive markets with thin profit margins. In the initial year, our corporation spent close to $1 million in complying with the requirements of Sarbanes-Oxley (SOX). Although year 2 provided some relief, external costs exceeded $700,000. One should question the benefit of these additional costs. Ampco operates in a global market and none of our competitors in our principal business are U.S. publicly-held companies. They do not have the burden of SOX, financial or otherwise, that our corporation does. This allows them to be more competitive and use management’s time to develop ways of improving manufacturing methodologies, look for alternative vendor sources, and create other product lines, to name a few, instead of SOX compliance.
The Advisory Committee has provided an alternative if the SEC concludes that some level of auditor reporting on internal controls is necessary. The new standard, referred to “ASX alternative”, would require an external audit of the design and implementation of internal control surrounding financial reporting but no testing of its operating effectiveness. Before one concludes that this recommendation may be an effective compromise, it would behoove one to also question the likelihood of public accounting firms willingness to issue “partial” opinions.
In closing, please think about the genesis of SOX – the deterrence of fraud. It will not be the mundane level of checks and balances necessary to comply with SOX or the inability of external auditors to use judgment when conducting their audits that will deter fraud, but through someone turning themselves in or from an anonymous tip.
Dee Ann Johnson