From: Karin M. Wentz
The management of Investors Real Estate Trust (IRET) appreciates the opportunity to comment on the draft report recently released by the Advisory Committee on Smaller Public Companies (the ďReportĒ), which examines the impact of the Sarbanes-Oxley Act of 2002 (ďSOXĒ) on smaller public companies. IRET is a real estate investment trust whose shares of beneficial interest are listed on the Nasdaq National Market. Under the Reportís recommendations, IRET would be classified as a ďsmallcapĒ company (those with market capitalization between $128.2 million and $787.1 million). IRETís annual revenues are less than $250 million.
IRET management strongly supports the Reportís recommendation that smallcap companies with less than $250 million in annual revenue be exempt from the external audit requirement of SOX 404. In the experience of IRET management, the burdens of compliance with the external audit requirements of Section 404 far outweigh the benefits to shareholders. In IRETís case, the audit fees paid to IRETís independent registered public accounting firm more than doubled as a result of the external audit requirement of SOX Section 404, and IRETís audit fees will continue at this level going forward. IRET also was required by its external auditor to hire an independent consulting firm to assist in the Section 404 documentation effort, and paid substantial fees to this consultant. In addition to the doubling of audit fees and the expense of the independent consultant, the cost in management and staff time was considerable, particularly so in the first year of SOX Section 404 compliance. Staff efforts to document IRETís internal controls to the satisfaction of IRETís external auditor displaced many other management priorities and activities. In the experience of IRET management, the larger independent registered public accounting firms are quite rigid and inflexible in interpreting and applying Section 404ís requirements to smaller public companies, and this is productive of much inefficiency and waste.
IRETís actual system of internal controls changed very little as a result of the requirements of SOX Section 404. Most of the staff time and money IRET spent on its Section 404 compliance effort went to document and review controls that were already in existence, but functioning somewhat informally, mainly because of IRETís size in terms of employees (IRET has 42 employees working in two office locations). Numerous detailed written narratives of policies and procedures had to be produced for review by the external auditors, flow charts prepared, and checklists drawn up. These increased costs in money and time as a result of the external audit requirement of SOX Section 404 produced, in the considered opinion of IRET management, very little additional benefit to investors. Accordingly, IRET management welcomes the recommendations in the Report, and would urge the SEC to adopt them.
Very truly yours,
Karin M. Wentz