Responses to ACSPC Request for Public Input
SOX Section 404/Internal Controls
Question 14. Do the benefits of SOX Section 404 outweigh its costs for smaller companies? Please explain.
a) Would you support a total exemption from SOX Section 404 requirements for smaller companies? Why or why not?
b) Would such an exemption have a negative effect on investors' interests or perception regarding smaller companies? Why or why not?
The following answers have been received:
08/02/2005 13:57:44 a) Yes. Small businesses need all the help they can get, and the extra expenses of SOX and 404 in particular will prevent capital formation (new companies will avoid going public) and encourage existing companies to go dark (the very last thing that Congress intended).
08/02/2005 14:31:32 ABSOLUTELY! We have totally thrown out the delicate balance between risk and reward.
a) This is the answer! I would support that 100%! As a long-time investor in small companies I have seen very little benefit from SOX 404. I have seen small companies in which I am a stockholder spend RIDICULOUS amounts of MY MONEY trying to comply with legislation that is total overkill. The mangements of small companies are wasting way too much of their time trying to comply with SOX 404--this time would be much better spent running their businesses. I can personally attest to the UTTER FRUSTRATION with SOX--I have attended approximately 35 annual stockholder meetings of small public companies, and there is almost universal disgust at the effects of SOX--by managements, stockholders, Board of Directors, etc.
b) Not at all from my point of view as a long-time investor in small companies. On the contrary, it would be greeted with a universal sigh of relief from investors such as myself. PLEASE PURSUE THIS REMEDY!
08/02/2005 17:44:12 No, in many cases the level of internal control required cannot be achieved as small companies have small staffes and cannot afford to have segregation of duties and other compensating controls.
a) Yes, the spirit of these laws were related to large companies where the possibility of fraud and mistatement have a higher probability and the ownership is widespread. The SOX 404 compliance is destroying the competitive edge of small US entrepeneurial companies.
b) Most investors want small companies to focus on their business not on compliance
08/02/2005 18:15:55 yes
08/02/2005 23:36:32 No
a) I would support an 80% exemption.
b) Positive- it would raise their earnings.
08/03/2005 01:39:17 Dramatically. The discussion on this point has been conducted by people afraid to not be "PC". There are almost no discernable benefits, and the costs and distractions are dramatic.
a) Yes. It is a terribly flawed process. It should be made voluntary for all firms. The amount and type of auditing done beyond the traditional financial audits, should be disclosed so that investors can choose with this information available.
b) I doubt it. I have not been able to see that investors have much understanding of what is being done now at all. I have yet to meet a single lay person who has any understanding of 404 audits whatsoever.
08/03/2005 07:01:34 a) yes, we had a system that worked very well for years, the envy of the world... SOX is a reaction, not a deterrent...At some point, we have to accept some numbers coming from public companies. enforceb the 33 and 34 act laws..
b) i dont think so, can any small investor like me interpret all the FASB and GAAP standards and rules anyway? Our Rules have Laws and Vice-Versa. there are now enough laws on the books that we are all criminals...
08/03/2005 08:55:04 At this point it does not, since we are a bank and highly regulated
a) Yes, due to the fact we are a bank and highly regulated.
b) No, because they do not like the added expense.
08/03/2005 08:58:39 No. We are regulated and that is enough.
a) Yes. Smaller companies that are regulated and that there is no market for the stock don't need to be under SOX
b) No. The investors we have are local people that know the people that run the bank. We are in a small town and everybody keeps up with everybody else.
08/03/2005 10:40:26 NO!!!!!!!!!!!!!!!!!!!!!!!!!!!
a) Yes. Smaller companies can not possibly have the impact on the economy that the Enron's, World Com's, etc have had. If a $180,000,000 community bank in McConnellsburg, Pennsylvania went under, would it have the slightest impact on the national banking seen?
b) It depends on how you classify a small company. Most small company's are locally-owned and operated and the only way you would lose investor interest would be to reduce earnings. SOX is reducing small companies earnings, and very frankly, small company shareholders don't understand, nor do they give a darn about SOX.
08/03/2005 11:03:25 Define "smaller companies" for us at $25 million cap, 653 shareholders...absolutely not. As a bank (as mentioned before) we are looked at from different agencies anyway...this is just a large additional cost with very little benefit.
a) Again define "smaller companies". My idea of smaller companies is different than most. But yes, smaller companies with a shareholder base less than 1500 or market cap less than 100 million, I would support an exemption. These sized companies do not experience the problems that caused the rise of SOX 404, and companies of this size are more adversly affected by the costs associated with compliance.
b) The size companies referred to above are typically not that actively traded, and therefore probably not have the negative affect.
08/03/2005 12:17:58 yes, self evident
a) yes. so that they can grow and have a chance. big companies can afford wasting money on goverment oversight and employing thousands. small companies never have a chance due to over kill.
b) no. they would have a chance to grow and become larger, then and only then should the burden of government oversight be allowed
08/03/2005 13:55:42 Yes.
a) No, but a more less expensive method should be equal and fairer for all companies.
b) All public companies need to post quartly. Investors want info about a companies health
08/03/2005 15:01:40 The benefits could outweigh the costs for some smaller firms if the firms have bad controls and unreliable financial reporting. For our company, it looks like the costs may exceed the benefits unless something can be done to cut out the redundancy with so many firms getting a fee to do similiar work.
a) Yes, i would support an exemption.
b) Yes, It could have a negative effect from some investors. Some investors may like it since returns could be higher for those companies that have good financial controls already. I am an investor in small companies and would support an exemption.
08/03/2005 15:22:49 No...read all of my comments above.
a) YES!!!!!! All companies below $250 million market capitalization and all fincial services companies (Banks) should be exempt.
b) Frankly, I am not too sure SOX's requirements have any effect on the invetor's perception regarding smaller companies such as ours. Most of our investors know us from the services we provide and the markets we serve. We do not have many from afar investing without knowing us.
08/03/2005 16:58:51 NO. The costs will end up close to 1/3 of our net income from prior year (if not more). We have good controls to catch material differneces now. I admit, we may be able to create/fix some controls over time but it won't be worth the additional costs.
a) I think entity level controls are important. If managment is setting the right tone from the top and the board of directors and audit committee are taking their jobs seriously, you have gone a long way to catching the fraud that started this whole thing. The activity level controls take so long to document and test and generally there are offsetting controls that can minimize some lack of activity level controls.
b) Not in our case. We take our jobs seriously and present accurate financial statements already. Assuming we need to continue with SOX compliance, we'll be throwing away 1/3 of our prior year's net income and getting some small knowledge/improvement in return.
08/03/2005 18:01:35 Please look into item no 29
a) Please look into item no 29
b) Please look into item no 29
08/03/2005 18:05:44 The benefits of SOX Section 404 do not outweigh its costs for smaller companies. Investors in smaller companies realize that it is a risky investment. They are not looking for the same safeguards that you would have with a larger company.
a) I would support a total exemption from SOX Section 404 requirements for smaller companies. As stated before, there are limited benefits that are completely outweighed by the costs associated with it.
b) Such an exemption would not have a negative effect of investors' interests in smaller companies. Investors invest in smaller companies for growth and assume risks when they do so.
08/03/2005 18:30:29 x
08/03/2005 19:54:33 I have no opinion on this question.
a) I have no opinion on this question.
b) I have no opinion on this question.
08/03/2005 19:55:50 NO! BECAUSE SOX SECTION 404 CREATES FORCED INTEGRITY!
a) WITHOUT SOX SECTION 404, YOU WOULD HAVE THE SAME ENVIRONMENT OF REGULATORY CONTROL THAT CREATED DALECO RESOURCES CORP & REGENCY AFFILIATES, INC. SEE ITEM #5 ABOVE!
08/04/2005 09:17:19 Being part of a small financial institution, I have already seen the benfits of SOX, but then again I am in the internal audit area. The cost was great getting here but I can see the benefits.
a) No. I think that no matter the size, to protect consumers or investors/shareholders, these requirements are a good thing. It protects everyone's money!
b) No matter the size, if you don't have the controls in place anything can happen. Let's face it, crooks are getting smarter.
08/04/2005 09:39:15 Definently. I think the better question is do the cost of SOX 404 outweigh the benefits for big companies? Small companies do not have the safistication nor has senior management taken their fiduciary responsabilities very serious in the past. SOX 404 has begun to turn that tide.
a) NO. There is a cost to obtaining capital. If you want to raise $10 million dollars in public markets you should not mind spending $200 thousand to assure the investors in those public markets that you will handle their investment responsably. If a company complains about spending a few hundred thousand dollars to give investors confidence then the questions begs, should that company be a public company to begin with. If you do not want to spend what it takes to protect the investor's confidence, maybe the company should not go to the public markets to raise capital.
b) Yes. If I invest $100 thousand in Joe's Radiator or $100 thousand in ExxonMobile shouldn't I get the same level of assurance? Whether I lose my $100 thousand in Joe's Radiator or my $100 thousand in ExxonMobile, I have still lost $100 thousand.
08/04/2005 10:40:16 The benefits are limited compared to the costs. To do this properly, we need additional staff and our audit fees will increase by more than 30%. We have the FDIC and state bank examiners in here every 18 months reviewing the safety and soundness of the bank and reviewing its regulatory reporting. Although we are under the asset threshold, we have had an annual independent audit for years. What more do you want?
a) Yes, read above. I think the cost to comply is causing smaller companies to sell out or try to go private. This is the opposite of how our market has grown and operated.
b) Not where they know/understand the company.
08/04/2005 12:09:05 Not even close. Quite the contrary by a margin of 100 to 1.
a) Yes. I think each company should be required to have at least one, if not two, mandatory meetings annually to discuss the whistle blower policy. Have the audit committee meet with the staff and make sure that everyone knows the Audit Chair and is comfortable with the process. This will provide a great control and deterrent to financial fraud, while having a positive cost/benefit.
b) Not in my opinion. Shareholders don't see any perceived benefit from SOX as it is, because no one understands it. As long as a company is having an independent audit of the financials, that's all they understand. Small companies have mainly individual investors. The sophisticated institutional investors of larger companies have the ability to understand and interpret the SOX 404 opinions, etc.
08/04/2005 13:38:24 That really depends on the organization and industry. The financial services industry is already heavily regulated so Sox is not as great of a benefit as it may be for another company/industry.
a) I would for banks subject to FDICIA because they are already doing much of the same work.
b) Not if the industry is already regulated in some other fashion.
08/04/2005 14:20:27 No way in hell. SOX has legislated incresed audit fees, and the auditors were part of the problem! They got the reward, what's wrong with this picture?
a) This will suprise the hell out of you, but no I would not support a total exemption. I would support a re-writing of the Section 404 requirements which were more "user friendly".
08/04/2005 18:05:44 No. The value does not come close to the cost.
08/05/2005 10:54:31 Depends on the specific company. If a company did not have adequate controls in place it is a benefit.
a) No, I do not like the cost of SOX but do not believe that any public company should be exempt.
08/05/2005 12:38:34 See item #5 above and then (at least in my opinion) the answer would be a definite YES!
a) NO! See item #5 above
b) See item #5
08/05/2005 12:44:28 Probably not, but I'm not the most qualified in this area.
a) I think this would be beneficial in holding down the regulatory burden for smaller companies.
b) I think investors' perception is based more on their expectation of a company executing its business model and building value for shareholders. SOX is an unnecessary distraction for investors and smaller companies.
08/05/2005 15:34:53 NO - most small companies have better communication and control. The documentation does not enhance the control environment
a) Yes - Smaller companies have less complexity.
b) NO - SOX has not improved perception of companies that have passed their sox implementation.
08/05/2005 15:43:46 NO in the small bank environment. They are required by bank regulatory to have external audits, internal audits and bank examinations. The examinations measure the quality of the internal audits and credit reviews. The added value of SOX compliance does few little to improve stockholder value and on a cost/benefit basis there is no one in the management, board, external audit or regulator arena that is cited a value added benefit.
a) I would support exemption for Community banks that are under the reporting level of FDICIA's internal control reporting requirements. The SEC cited the fact that SOX was modeled on that reporting law. Why not observe the bright line in that law for small banks?
b) I believe it would not have a negative effect and apparently Congress agreed in the The structure of FDICIA. Over and above the general impression, there are a host of enforce tools available against banks and bankers in the event of failure of financial reporting (and other crimes) through banking laws that can be invoked far more rapidly and with greater effect that the SEC laws.
08/05/2005 16:45:38 The benefits of 404 far outweigh the costs to companies, because they must learn to adapt, survive, be transparent and be accurate. the market is not very forgiving, and it is not a place for companies that can't survive on their own. In the financial jungle, feeding the weakest of the species is a recipe for disaster.
a) No, because I can't see any need to allow companies the ability to conceal information that is not desirable to investors. That creates problems in the markets - and maybe the company should never have gone public if they weren't ready to go public.
b) Such exemptions might allow the day traders and momentum players to swing the prices of the stock, and it would be good for those investors, but the average investor would be blindfolded to the truth,a nd would be better off staying out of such companies until the exemptions were lifted and the truth was known.
08/05/2005 19:33:08 The costs are not supported by the benefits for small companies. The companies transactions are certainly not as complicated as they are with large companies. Most small companies are rather straight forward manufactuing, sales and receipts on a limited distribution and product line.
a) I would support an exemption for those that desire one. I belive that companies that comply with SOX should receive a pat on the back and a superior stock designation for complying.
b) I think that if there was a 2 tired system, there would be a reduction in the price for those electing not to comply. People that invest in small companies are always taking a larger risk than investors in larger companies. If small companies were not required to comply, there would not be a negative effect.
08/06/2005 13:52:06 No. There is a minimum cost for SOX compliance in most cases, and it is disproportionately high for small companies. The benefit is not proportional.
a) Yes, unless SOX 404 is significantly changed to make it less expensive.
08/08/2005 11:10:11 no. It is a financial cost burden that far outweighs the benefits. A conscious company always will do everything within cost reasonableness to control risk of errors in internal controls and financial reporting because they know on false statement or report of fraud will destroy them - unlike these massive conglomerates that can absorb a failure like this as a simple slap on the wrist.
a) yes. as stated above, a conscious small company will already do everything cost feasible to control risk in all areas because a bad report can destroy it in one swoop.
b) no. in fact more might return to investing in small companies as EPS wouldn't be taken away by unjustified huge spending on controls the government thinks "one-size-fits-all"
08/08/2005 11:39:29 No. In my industry, federal regulator burdens are real and substantial.
a) I think so. However, I think you need to look at certain industries as high risk. Look at Enron or WorldCom. They are in industries that provides for income and expense recognition on long lived and highly speculative assets and liabilities. Oil reserves, the value of broadband, and other income producing assets are highly variable and subject to change even if the management team is honest. In banking, we accrue for loans no more than 90 days past due. In most cases, the allowance for loan losses and provision for loan loss expense is our biggest estimate. Even then, we have a government agency review our books once per year. In our case, it appears rather redundant. In summary, I would like at the full scope of an industries regulatory review process before making a decision.
b) No. most of our investors are local and judge our company, good or bad, by what they see or experience in the community, our earnings, and our dividend payments. Despite the availability for anyone to puchase stock in Hopfed Bancorp, the vast majority of owners life in our operational area.
08/08/2005 14:06:10 I believe I have already answered that question. The answer is obviously yes. And it's not just cost of SOX 404 compliance. Look at what is happeneing in the marketplace for audit services. If you have a National firm (say one of the Big 6) do your audit, if your audit fee is less than $200,000 right now, you are in danger of having that firm come to you and say you're not big enough anymore. Either pay us more money or go find another auditor. Our audit firm, which we have been with for 20 years, hiked our audit fee by over 50% in one year and the reason they gave was basically because they could. The marketplace has gone crazy with the supply of audit firms getting smaller and the amount of compliance work they have to do getting bigger. I expect the fee to be hiked again this year but what am I supposed to do? We have had no issues with the auditors ever. They haven't made any adjustments or even proposed any adjustments for at least the last 5 years. Our business is very stable with no changes other than some moderate growth. Management is stable and the current management team has been in place for almost 20 years. Our stock is not actively traded and has not been volitale at all. Yet they come back with a 50+% increase in fees. Now that fee increase is one of the other unintended consequences of SOX 404 implementation. All fees increase and that is happening throughout the public company sector. It does seem curious that auditors clearly failed their duty in at least the Enron and WorldCom situations yet (Arthur Andersen notwithstanding) major audit firms are seeing record profits. From a company standpoint, that makes no sense. Smaller companies are paying a disproportionate tax due as result of the added compliance burdens. It hurts our competitiveness, shrinks our returns to our shareholders, and unfairly rewards a very small sector of the econmomy (professional service firms)when it can be argued that they had no right to any such benefits. I also want to point out to you that I am a practicing CPA and a partner in a regional Firm in California and my practice is primarily in audit. I aslo spent 25 years with a National CPA firm as well. So when it comes to assessing the CPA world, I'm not just some outsider throwing stones.
a) I would support such an exemption. I believe the answers given to the previous questions answer the "why" question.
b) No. There are more significant issues to worry about when making an investment decision. All investors recognize there is risk to any investment decision. The quality of information on which to make such decisions is better than it ever was. SOX 404 does not appreciably add to that information.
08/08/2005 15:43:24 Not for smaller companies as written in the existing rules. The Sarbox corporate governance rules by themselves are huge incentive for management to report timely and correctly.
a) Not necessarily. Public company need to be held to a higher standard than private companies. However, this higher standard is not a "check the block" or "document or die" mentality. Companies and their auditors are in danger now of missing the forest for the trees. The higher standard is in the Boardroom, the executive management offices and the financial accounting offices. Smaller companies and their auditors need more time to receive and implement new rules for smaller companies. Smaller companies have always "outsourced" much of their professional expertise in the financial reporting, internal audit and income tax areas. They cannot afford to have that much expertise in-house. Under Sarbox 404 larger company rules, companies virtually have to have all of their expertise in-house.
b) Auditor's opinions on the financial statements have worked pretty well for smaller companies for many years. Sarbox, excluding Sarbox 404, provides tremendous incentives for CFOs and independent accountants to report correctly. I believe investors have been satisfied with auditor opinions and believe that Sarbox 404 is an over reaction to a very few large company exceptions. There are hundreds of material weaknesses being reported that are having little or no effect on company's stock prices. That in itself reflects form over substance.
08/08/2005 21:39:10 The benefits of SOX 404 do not outweigh the cost. Small companies are typically much less complicated than their larger counterparts. Any additional internal controls imposed by SOX 404 will not necessarily be of benefit above-and-beyond the current audit requirements, but they will incur additional cost.
a) We would support a total exemption from SOX 404 requirements for very small companies. The market for the securities of very small companies is already different than for large companies. OTC Bulletin Board investors are already knowledgable concerning the risks associated with "penny stocks". This is even more abundantly clear for those who invest in "pink sheet" companies. Giving small companies a waiver for 404 compliance until such a time that their market cap (and presumably the size of their operations and resources available) increases to a suitable size would not harm the investing community in our opinion.
b) Investors already have pre-conceived notions concerning micro-cap and "penny" stocks. Current listing requirements for NYSE vs Nasdaq and even Nasdaq vs Nasdaq Small cap are already known. This is even more abundantly clear for OTC Bulletin Board and Pink Sheet companies. We don't belive that an exemption would be viewed any more negatively than where an issue is traded.
08/09/2005 09:30:31 NO. Part of the problem with SOX is failure to define "small" except by market cap. "Small" may differ based on industry risk profile, ie banks.
a) Yes. Sec. 404 does not benifit the stockholder.
b) No. Shareholders could care less about SOX.
08/09/2005 16:26:34 Clearly the benefits are not exceeded by the costs in banking...I cannot speak from experience about other companies.
a) Yes...as a minimum, highly regulated industries such as banking are not benefiting from this regulation. We view small but public companies as much better lending risks than small but private companies because of the ability to have confidence in the numbers...this is not significantly improved as a result of SOX.
08/09/2005 17:25:10 No. See answers above.
a) Yes most definately. See answers above.
b) It would enhance their interest as they would know a large chunk of limited resources wouldn't be spent on form vs. substance.
08/10/2005 09:04:41 we believe the benefits would not outweigh the costs. again, we are a heavily regulated bank, with a fairly small group of fairly well informed stockholders.
a) no comment
b) do not think it would have a negative effect in our situation.
08/10/2005 13:44:39 At some point yes...but define smaller companies. At some size the cost certainly outweighs the benefits.
a) Again define smaller companies. But companies let's say with 800 shareholders...it is probably not actively traded...it very well may be a small capitalization, and a small employee base. The costs will probably far outweigh any benefits.
b) Investor's looking at companies with 800 shareholders, no. There is not much of a market and thus not many people looking at these companies.
08/10/2005 16:00:18 Absolutely not. We're a bank! We're regulated more than enough. The diversion and extra cost is not in the best interests of our shareholders.
a) YES!!! 404 appears to be a total over-reaction to a very small number of large companies engaging in unethical/illegal activities. With or without SOX, people like that will continue to find a way to do so. The vast majority of businesses in this country are led by ethical, honest people. Why are we paying the price??
b) No! We would be talking to our shareholders much more openly and frequently than we are now.
08/10/2005 17:18:15 YES - too costly in the current environment, without a different set of criteria to be met.
a) NO - see answer to 13
b) Yes - different and unfair playing field
08/10/2005 22:09:27 I think I addressed this throughout the above questions
a) I would exempt SOX at certain a market cap level. I think they should have an external audit firm they can trust. Believe me, the remaing audit firms have found religion and this has put enough burden on companies to report accuratly. Especially when the auditor reports directly to the Chairperson of the audit committee, who has to be an outsider.
b) I don't think so. There is still a lot of respect for a company that speaks freely to the investor (within reason) and performance always creates trust. Say what your are going to do and then do it.
08/11/2005 08:35:22 The costs are substantial for a small organization, and the risk of 'harm' is minimal. The current approach by the SEC and external auditors probably costs EACH small company more in a given year than they will ever incur in a loss due to management fraud. Seems a bit heavy handed.
a) Yes. Let the 'shareholder' be aware of the risk in the sense that they are exempt from the SOX protocol.
b) I believe it would have a positive impact, as investors would expect less spent on SOX equal more returned to the shareholder.
08/11/2005 20:27:22 Since there are no benefits why make smaller companies subject to SOX404. I think my previous remarks explains my views.
a) ABSOLUTELY - As I said most smaller companies either have adequate control systmes or managment involvement to an extent that compensate for the lack of controls.
b) Well YES - I would think that smaller companies would need to sell the fact that there current structure / system is adequate. On the other hand if we go back to pre SOX404, auditors were able to evaluate and report on internal controls. The playing field changed because the PCAOB took a hard line approach and made the process inpossible to deal with for a smaller company.
08/12/2005 13:12:10 Not for banks because we are already heavily regulated.
a) Again, I would for banks up to a certain large size as noted above because of already heavy regulation.
b) I don't believe that it would in the case of banks of smaller size because of the track record investors have shown toward being attracted to their stocks.
08/12/2005 14:46:45 If performed in an efficient manner, it outweighs the cost.
a) No, as stated before I believe it provides a needed benchmark for the investor to compare the financial health of a company.
b) Not having the requirement would not deter an investor. However, the investor would be partially blind if the control environment of the company was unwell.
08/12/2005 16:35:01 No, I fully believe that thieves will find a way to steal no matter what laws or rules are enacted. Investors need to weigh the merits of acompany, including size limitations, before investing.
a) Yes, the cost is too high for the benefit.
b) No. It hasn't in the past so I don't see why it would in the future. Also, small companies may be inherently riskier than big companies so placing a higher risk premium on small companies may be perfectly appropriate.
08/13/2005 12:39:43 No
b) Don't know
08/15/2005 13:08:27 Traditional controls in smaller companies were based on managment awareness and involvement. SOX changes that to reliance on documentation and process. Both documentation and defined process are expensive for smaller companies, with limited benefit.
a) Yes. Controls in place prior to SOX were adequate.
b) Investors appear to have limited interest in SOX, except for the cost of compliance.
08/15/2005 14:27:30 In the long run, I think so but, as noted above, more for the benefit of internal management than for the benefit of public disclosure. In recent history, it is pretty clear that a lot of small companies paid a heavy price for the panicked way in which 404 was implemented.
a) It depends. If 404 is going to continue to be applied as it was for the 2004 season, I would support an exemption for just about anyone. If it can be made into a reasonable way of ensuring that internal accounting systems are effective in material respects, I have no problem with applying that standard to all public companies.
b) Re their interests, I have a hard time believing that 404 is going to have much practical effect on the quality of small public company disclosure. It's most likely effect is a more rigorous application of the details of accounting rules that most investors don't understand and therefore the effect of which most investors will not appreciate. As noted above, I think the kinds of investors that the SEC tries to protect don't care much one way or the other about the effect of 404.
08/15/2005 15:10:05 Yes, the temptation for greed is too easy with lots of public money knowing that there are no controls; it's too easy to abuse that priveledge.
a) No! If common sense were used it's really not all that difficult, especially if they got creative and outsourced key controls, e.g. reconciliations, policy creation and adherence, etc.
b) yes, because then the corporate lawyers will fight to define how small is small then do what they can to create spinoffs of currently medium/large companies to get to some threshhold to avoid compliance.
08/15/2005 15:13:01 Absolutely not!!! I think the correct audience to ask this question to is the investing public. Virtually all of my accredited investors agree with me. They look at the costs as an additional burden on the income statement that they are paying for. They rely on the financial statement audit for the numbers. I believe that everyone has overlooked the fact that if the financial statement audit is planned and performed appropriatly, virtually all flaws in internal controls will be identified. Also, while its almost impossible to catch fraud if properly planned out, a 404 audit is just as likely as a financial statement audit to catch it.
a) Yes, I just believe the costs don't even come close to outweighing the few benefits.
b) As mentioned above, most of my investors that I have spoken with do not support 404. If certain segments of public investors want to invest in companies subject to SOX, then they are free to choose other non-exempted companies to invest in. What's the big deal? It seems like the vocal investing minority has trumphed the investing majority and they believe that the rules should be equal all around. I don't agree with that. The good thing with my idea is that the markets will dictate what is required. If they view exempt companies as more speculative, the stock price will reflect this. If the company doesn't like this label, they can go hire themselves an army of consultants and become 404 compliant and remove themselves from the exempt listing. This would be a good case study to see what the market caps under both scenarios would be.
08/15/2005 15:14:45 No..........cost becomes to large a portion of the costs of doing business.....
a) Yes....could use a short form list of items required.
b) Smaller companies are generally separate breeds, anyway.
08/15/2005 16:33:43 NO- it is a serious disadvantage to small companies to compete in the global competitive environment. The costs are outweighing the protections being given the shareholders.
a) Yes- let us be reasonable, how is a company that is scraping out profits and trying to deal with cash flow issues supposed to have its financial staff spending a huge percentage of its time on 404 compliance and paying the auditors huge sums of money. It is an undue burden to small companies like Seneca.
b) Investors could care less as long as they continue to receive audited financial statements that they can review. Our investors agree completely with me that it is a waste of time and money and it is coming right out of their pockets.
08/15/2005 16:41:14 Too early to tell.
08/15/2005 18:59:52 No - Small companies often do not have the number of people or information systems to implement good internal controls. Paying a lot for a report that says there are weaknesses in internal controls is not helpful.
a) I would support a total exemption from 404 for smaller companies, but not an exemption from telling shareholders about the state of internal controls. I think shareholders deserve to know what is going on, but not at the cost of a 100%+ increase in audit fees.
08/16/2005 09:51:21 No. A lot of work is done to give auditors comfort and there are benefits for companies, but the cost in terms of dollars and time are not providing the benefits.
a) I would prefer to see a slimmed down version of requirements for smaller companies so that there is not a "haves" and "have nots" in the capital markets. It would be nice to have a Sox Lite for smaller companies.
b) No because the shareholders of small companies want their company to be investing in people, r&d, marketing, share repurchases not internal audit.
08/16/2005 10:10:36 Absolutely not. There are few benefits, but high costs and high risk for non-compliance.
a) No. I would overhaul the entire requirement as it provides little value and high cost for everyone.
b) Yes, they would be perceived as inferior.
08/16/2005 10:13:05 No, the benefits DO NOT outweigh the costs for smaller companies. The costs are substantial, while the benefits are negligible. Very small companies ("micro-cap"), whose stock trades very infrequently, act more like private companies. Compliance with 404 will not add any value (real or percieved) to small companies. In fact, many small companies will have to disclose a "material weakness" in intenal controls due to a lack of segregation of duties in the accounting department (very small companies do not have enough people in the accounting department to have adequate segregation of duties, nor should they). There will be so many segregation of duties and other material weakness in internal control disclosures by small companies that investors will ignore them and rely instead on the audited financial statements and executive certifications. When all is said and done, compliance with 404 will be a significant expense for small companies with NO value added.
a) Yes, for micro-cap smaller companies. Very small companies ("micro-cap"), whose stock trades very infrequently, act more like private companies. Compliance with 404 will not add any value (real or percieved) to small companies. In fact, many small companies will have to disclose a "material weakness" in intenal controls due to a lack of segregation of duties in the accounting department (very small companies do not have enough people in the accounting department to have adequate segregation of duties, nor should they). There will be so many segregation of duties and other material weakness in internal control disclosures by small companies that investors will ignore them and rely instead on the audited financial statements and executive certifications. When all is said and done, compliance with 404 will be a significant expense for small companies with NO value added.
b) No, investors still have external audited financial statements and executive certifications under SOX section 906.
08/16/2005 10:21:17 Cost outweigh benefits in the short term. I believe that longterm benefits can outweigh costs, if the PCAOB and audit firms can find the right balance, and advise companies appropriately.
a) No. I think all public companies should comply.
08/16/2005 10:26:28 no unless you need the US capital markets; no benefit if you have any main listing such as UK
a) no, those with other main listings of recognised stock exchnages only
b) no, most of them are quite happy with main exchanges such as London, Frankfurt, Paris, Tokyo
08/16/2005 10:42:02 see #13
a) Yes. The burden of 404 compliance is simply too great for small businesses. A scaled down internal controls review would be far more appropriate for companies with a sub-$750 million market cap.
b) No. Investors don't understand or care about SOX.
08/16/2005 10:44:16 No. I dont think we have seen reasonable risk/reward for our investment.
a) No. I think all public companies need to be subject to same rules. I do think interpretation of the rules has been unreasonable and am hopeful good business sense will once again prevail.
b) See above.
08/16/2005 10:45:16 depends on the company - but generally no
a) Yes, or at least a reasonable scale down.
08/16/2005 11:18:54 What benefits?
a) Absolutely. I don't beleive there is a significant risk to the markets if a company occasionally fails or has committed fraudulent activities. In fact, I believe that is part of the risk inherent in any system. If the auditors are doing their job, they will catch most, but not all, of the problems. The U.S. capital markets have thrived for decades under the old rules. Imposing onerous new regulations will not help in the long run. I think the accountants failed to do their job in the Enron, Worldcom, etc cases, in part due to the consulting fees they were being paid. I think the rules put in place eliminating the consulting fees carrot was all that was necessary to cause them to pay attention to the audits. I think that solved the problem and Sox is unnecessary.
b) I don't think investors in smaller companies pay any atttntion to Sox. Most such companies have no analyst coverage and very little in the way of professional investor interest. I don't believe the average investor cares about Sox.
08/16/2005 11:52:16 No. We have always had good internal controls. To our knowlege there has been no theft or other type of activity. The new documentation proceedures will add cost and employees which will not improve the internal control at all.
a) Not total but significantly less than the GM's of the world. I would also raise the benchmark to $150,0000,000.
08/16/2005 12:14:10 NO--as stated several time above
a) Yes, there is a different risk at smaller companies and the invertor needs to understand the company at a different level.
b) Probably not, note the comment to item 13 above.
08/16/2005 12:15:34 They do not. Compliance with SOX 404 will not change the financial results reporting accuracy for our Company at all.
a) I would definately support a total exeption from SOX 404 for smaller companies. My impression is that SOX 404 is geared towards larger, multi-location, multi-country companies that need to have controls in place. For a company like ours which is one location and the entire management team reviews the financial statements monthly, we simply do not need to jump through additional hoops to prove we are complying with SOX.
b) I don't think so. Investors typically invest in a company based on its products, its potential growth and its management. 90% of all companies have good management with high morals that do the right thing. However, because of several bad apples, we have put a very burdensome system in place to help legislate morality.
08/16/2005 12:40:54 No
08/16/2005 12:42:56 Never. No. Under no circumstances.
a) Of course. Companies with less than $1b market cap should not be subject to SOX. The costs are completely out of hand otherwise.
b) I have repeatedly asked this question of investors when doing 1-1s. No investor has ever objected to an exemption for smaller companies. Indeed, they all are far more worried about the expense and its effect on EPS.
08/16/2005 13:04:14 From my perspective, our company has an adequate system of internal control in place. It's the cost of documentation and the need to hire outside expertise to document all of our processes that does not seem to be cost justified. If there was more specific guidlines as to what processess and controls needed documentation and what is exempt, I believe we could complete the task without outside help, or at least only minimal help.
a) I support an extension of time to comply, but more importantly, I support the establishment of understandable guidelines that small businesses can use to become compliant with 404 without a need to over-document and spend time and effort on processes that are not critical or material to the financial statements.
b) No. It would have a positive effect. Costs would be lower and there would be more chance of the costs being justified if compliance was less onerous and more meaningful.
08/16/2005 13:12:04 Absolutely without question the costs of the present SOX outweigh the value; see above. The "costs" are not just the directly incurred costs... but we are also talking about lost opportunity, competitive damage, etc.
a) No... but we should carefully select the 404 items that are appropriate and "just good business", structure the audit role such as to not impose undue additional burden, set self certification in some instances, and cut the rest.
b) The investment community is focused on shareholder value and, in my opinion, absent MAJOR miss-steps in SOX regulatory compliance issue context, have litle or no interest in SOX matters. I have never had an investor ask a question about our compliance stautus on SOX as such... the question is always to the effect of "what is SOX costing you"!
08/16/2005 13:19:29 Absolutely. The news is not full of stories of smaller companies that commited Enron-style fraud. The vast majority of the fraud SOX 404 aims to address was by the heads of multi-billion dollar companies who focused more on personal gain than on ethics.
a) Yes. Smaller companies (especially banks) tend to be so localized and focused on their communities, that their shareholders are also their customers and their fellow community leaders. This relationship-based accountability is stronger than anything the SEC could possibly put in place.
b) Not in our case. Our investors have their money with us not because they wanted the highest rate of return or the most liquid of stocks in their portfolio. They invested with us because they wanted to be a part of owning a local company.
08/16/2005 13:20:23 Absolutely feel benefits outweigh costs. It provides a mechanism for small companies to deploy better controls and offer comfort to the public market re the financial integrity of processes and reporting. It undermines the credibility of the capital markets. Forcing auditors to use a risk-based approach mitigates the cost concerns from intial deployment, but all well managed companies should be benefitting from SOX
a) No. Misrepresentation, fraud and inappropriate conduct is not correlated to size of a company. Forcing best practices and minimum control standards on all companies benefits everyone despite the cost. In this area, tighter standards over public companies should happen and using cost as an excuse to exempt small companies is probably the worst outcome. They are the ones who stand to benefit the most by more rigourous controls and processes over internal control and financial reporting.
08/16/2005 13:25:32 The principal benefits of SOX 404 appear to fall on the public accounting firms. I haven't ascertained why I must pay them for the sins of Enron, Worldcom et al.
a) YES! I beleive it is a case of "unintended consequences" that Congress imposed in a knee jerk reaction. The Final Four are funding their retirement accounts on this, so they will not point out the emporer's lack of clothes, nor will the regulators whose importance is elevated.
b) I believe it would provoke a monumental yawn. The market has yawned over the disclosures to date on system shortfalls (of course, only honest companies will tell on themselves, the dishonest will play audit lottery).
08/16/2005 13:27:00 No. The costs significantly outweigh the benefits. For larger companies, with economies of scale, the benefits probably outweigh the cost. A more common sense approach is needed.
a) No. See my answer to question 13.
b) Yes. There would be a perceived higher risk with smaller companies.
08/16/2005 13:30:33 Not at all. I find very little value in 404. My employees are exhausted and are taken away from working on real business issues.
a) Yes, this big issues are with large companies. Simply look at the public history.
b) None at all.
08/16/2005 14:08:05 The issue for smaller companies is affordability. Larger companies must have controls to survive. Smaller ones also need controls, but don't require the process formality required by SOX.
a) Yes. Smaller companies need to focus on being quick and adaptable. Putting a regulatory straight-jacket on them when they are public hinders their ability to change and adapt their internal systems. Changing major internal systems late in the year is very difficult to do in the current regulatory environment.
b) Investors in smaller companies are looking for increased revenue and cash flows, which in turn will cause an increase in the stock price. The cash flow statement ignores accounting interperiod misstatments.
08/16/2005 14:23:10 I believe that focusing on small companies is an error. The real issue is the cost of SOX 404 for all companies, not just small companies. It is just more obvious at the small companies.
a) No I would not support a total expemtion from SOX 404 for small companties. I believe that all companies should be on equal footing. The soluiton is to change the detail SOX 404 evidence requirements that keep the PCAOB and Lawyers at bay. The real SOLUTION is for the PCAOB to take the audits over directly and impose a tax on all companies rather than favor one type of company over the other.
b) Investor percetpions will probably be negatively impacted by a lower qualtiy audit. If all companies were audited by and certified directly by the PCAOB investor confidence would be increased for all companies.
08/16/2005 14:54:27 SOX section 404 costs significantly exceed the benefits. The cost of documentation and testing of controls is material. Sox 404 does not permit what has historically been one of the small company's best controls, hands on management and being close to the staff performing the work. Good managers in a small company are close enough that they know when things are not working as they should.
08/16/2005 15:15:12 No way, No how. As I stated earlier, I have yet to see the benefits, if any, of SOX to our company. As such it is impossible to out weigh the costs.
a) Yes I would wholeheartedly support that. Companies like ours, will little or no active market for investors has little need for SOX sponsored financial certification. I believe that the requirement to be listed as a public company needs to be increased from 500 to 1,500 or 2,000 shareholders. This would eliminate many small companies from registration, but it would also be sure that companies with more active investor activity will be covered by SOX.
b) I don't believe it would and as is the case with many companies whose stock is not actively traded, what differece would it make.
08/16/2005 16:08:50 No, especially at smaller companies where (i) management is hands on, (ii) has a lot of personal relationships throughout the organization and (iii) owns a significant portion of the company.
a) Yes. The majority of companies, officers and directors are doing a great job and should not be penalized for the actions of a few high profile cases.
b) Not to the informed investor.
08/16/2005 16:09:47 No. See 3. above.
a) Yes. See 3. above.
b) No. Most investors in very small companies have specific personal knowledge of the company.
08/16/2005 16:16:04 Yes definitely. See above reasons.
a) Yes for reasons discussed above. it is truely a hardship for micro caps and could cause entities to become insolvent.
b) No. Smaller companies are growth oriented and carry a different level of shareholder investment risk.
08/16/2005 16:45:09 No! The benefits are hard to see and the costs are hugh!
a) Yes! The failure of a number of large companies which resulted in SOX 404 may not justify SOX 404 for large companies. It clearly does not justify SOX 404 for a small company. A small company has no ability to influence the independence of a hugh accounting firm.
b) The effect on investor's would be positive. The investors never asked for, see no benefit in or care about SOX 404.
08/16/2005 18:21:27 I already explained in previous questions.
a) Absolutely! It adds so little value, why keep requiring it?
b) I don't think it would have any impact.
08/16/2005 18:35:41 We have seen some good areas for improvement based on our SOX 404 work, but cannot imaging the benefits even approaching the expected cost.
a) Yes. Such companies have been and should continue to be obligated to maintain controls adequate to enable production of trustworthy financial statements and reports. The proof of the pudding can continue to be in the results of the financial statment audit.
b) No. Investors are/should be interested in knowing they can rely on the financial reports of the company to inform their investment decisions. The SOX404 attestations are of no value.
08/16/2005 21:29:07 No. Smaller companies normally have much simpler financial structures than large companies, and investors can more readily determine the validity of financial data presented.
a) Yes, as long as the smaller company is having a complete audit done by an independent CPA firm.
b) No. See 14.
08/16/2005 21:40:38 The cost of fraud for a small company is far less than the cost of increase regulation. Shareholders would be better served by
a) Yes. Because the type of things caught be sox are not worth the cost.
b) No. Investors don't presume that all companies and all managers are crooks--only the SEC does that. Investors know that if people want to commit crimes, sox will neither catch them nor deter them.
08/17/2005 06:57:10 a) I would not support a total exemption, but a less "stringent" level of requirement should be considered for smaller companies. As mentioned before, the spirit is right, but the implementation approach is the one where auditors are getting carried away before they need to "cover themselves."
b) No - It is unclear that investors worry about SOX that much or make such direct links to company value and SOX compliance
08/17/2005 10:59:57 No the benefits of SOX do not outweigh it's cost for smaller companies. I believe there is a fixed cost for preparing to be SOX complaint and sustaining compliance for companies that are less than 100 million market cap to 1 billion market cap. Truly, not justifiable.
a) I would strongly support exemption from SOX Section 404 for smaller companies to encourage new companies to consider the public capital markets.
b) No effect.
08/17/2005 12:28:22 I do not think so, at least at this point.
a) Too late to address this questions, we are already focusing on significanlty reducing our SOX 404 costs.
08/17/2005 12:36:00 As mentioned, I see little benefit and extreme costs.
a) Yes. Smaller companies represent fewer investors and lower market caps, thus lower aggregate risk, yet they're going through procedures generally designed for companies worth billions that are major players in the national economy. There's lower aggregate risk. Also, many small companies have significant insider ownership which is its own incentive for accurate reporting and strong (but appropriate) internal controls. Finally, for industries already regulated, SOX is covering ground that is already covered by the company and their regulators.
b) Investors tend to be quite skeptical of small companies anyway, with pretty good reason on the whole. I don't believe Sarbanes Oxley has had any positive impact at all on investor confidence in smaller companies.
08/17/2005 12:48:33 NO.
a) YES.Don't waste shareholders money and employees time and concentration.
b) NO. So far all the major fraud has been with large cap companies.
08/17/2005 13:25:50 In my opinion, yes. Because small bank holding companies are already subject to a large amount of external examination as previously noted.
a) For small bank holding companies because of the existing examination requirements.
b) It would have no impact. The stock of MVB Financial Corp, as is the case with most small bank holding companies, is held by community members, employees, Board Members and customers. They are only public companies because they have more than 500 shareholders. There is no public float.
08/17/2005 16:18:39 Quite the opposite. See response to ques 1 above.
a) SOX could be totally repealed except for the requirement for the CFO and CEO to certify the accuracy of the financial statements and related footnotes. Everything else in SOX is a waste of time and money. If the CFO and CEO are willing to sign their certifications, the investing public should be able to assume that the CFO and CEO have done enough diligence to as to make the financial statements accurate because the penalties for false certifications are very severe.
08/17/2005 18:49:20 Yes - not doubt. The benefit is to the shareholder which is why this act was passed, not to benefit the company. So from a shareholder point of view, if the company they invest in spends $$XX to comply with SOX and the shareholder knows that his/her capital is entrusted to a management team that takes corporate governance seriously, they are better off by far.
a) NO - why should shareholders of smaller companies be afforded less protection. Simply saying that the shareholder knows that the risk profile is higher in smaller companies does not mean that we should endorse that philosophy and give management in smaller companies a pass. This would be a very bad idea. An example - was just involved in a smaller public company where there was a material revenue recognition error that was caught (not by financial management or senior management) before the Q was filed. If filed as it was prepared, shareholders would have thought that management was meeting its growth and profit projections when in fact they were missed by a material amount. This never would have been caught had it not been for SOX. Also, fraud happens at all size companies and $$ from the public should be protected by the same rules regardless of the size of the company.
b) I don't think so since most investors in small companies are looking for large % increases in the value of the stock.
08/17/2005 18:49:27 No - see above
a) No - there should however be higher materiality thresholds and the external audit need only be done once every three or five years
b) No as I would expect that any investment bank taking a company public would want an audit opinion on controls at the IPO. The issue is the materiality threshold (and therefore the cost), not the idea per se.
08/17/2005 19:31:08 No. Additional costs and distracting management's focus far out weigh any benefits.
a) Yes. Because of reasons stated above - Additional costs and distracting management's focus.
b) I don't believe so. Most of our investors ask us how much earnings per share will be depressed. I have yet to have a shareholder ask about any value they may get out of our 404 compliance.
08/17/2005 21:27:12 Yes. It is a significant cost with little benefit and does little to address and prevent the type of frauds perpetrated by Enron and Worldcom.
a) Yes. It is a significant cost with little benefit and does little to address and prevent the type of frauds perpetrated by Enron and Worldcom. The cost to investors far outweigns any benefits.
08/17/2005 22:55:14 No, I don't think so. The cost of implementation and auditor review far outweigh the benefits we will see.
a) No, I think a scaled-back version of 404 would be appropriate. Total exemption would send the wrong message at this point. Small should be determined by revenues, not market cap. < $100 or $150 million in revenues, for example, for full 404 compliance.
b) I think total exemption would have a negative effect on investor interest and therefore, valuations of small companies. The unfortunate message that SOX sent was that there were few to no controls before and management was not to be trusted. By exempting a class of companies from compliance, there will be doubts as to the reliability of the published information and an incentive to remain below the reporting threshold through various means.
08/18/2005 08:03:31 What benefits do SOX provide ? - Yes, we support a total exemption for smaller companies up to $100M per year. - No company can profit. Investors like profits.
a) Yes, we support a total exemption for smaller companies up to $100M per year.
b) No company can profit. Investors like profits.
08/18/2005 08:05:33 The benefit is the same for smaller companies as it is for larger companies because the primary benefit of SOX Section 404 is an increase in the reliability of financial statements for investors. How can investors trust the integrity of small company financial statements if the small companies are not held to the same standards as the larger companies? And what will happen when an investor in a small company finds that their investment is worthless due to issues that would have surfaced had the company been subjected to SOX 404 scrutiny? Since the cost of implementing SOX Section 404 should be drastically decreasing, the question of whether the benefits outweigh the costs cannot be correctly evaluated at this time. The PCAOB policy statement that was issued in May based on the SEC´s roundtable discussion should, if given proper weight, significantly reduce the cost of SOX compliance. The prohibiting factor is that the guidance is directed at the auditing firms (as it should be from the PCAOB). However, audit firm resources are stretched so thin right now that they do not have the time to consider overhauling their methodology immediately. Since the audit firms´ role is to evaluate the internal controls testing of public companies, why can´t public companies use this guidance to redesign their own controls evaluation methodologies? Audit firms are receiving guidance, but the companies themselves are left waiting on their auditors. The SEC should notify public companies that they should use the PCAOB guidance to design their controls methodology or provide guidance directed specifically at public companies instead of at their auditors. This would immediately decrease the cost of compliance while providing investors with the level of information that they deserve.
08/18/2005 14:30:38 NO, because of the emphasis on detail contols.
a) No - need top level controls
08/19/2005 02:56:12 No. The costs are simply too high relative to the size and profitablity of smaller companies.
a) Small companies should be permitted to follow a lighter set of guidelines or should be permitted to comply on a rotating basis.
b) Positive. It would permit better use of resources to grow the business, while still maintaining a good base of controls. The penalties for fraud, misappropriate, and unethical conduct by management is a huge deterrent and will have a much greater effect than SOX 404.
08/19/2005 11:44:44 No, the cost in management time is not contributing to the overall benefit to any stakeholder - owners, public, employees, etc.
a) Yes small companies with less than 250 employees can easily be managed by talented executives without having to document all company controls.
b) No - #1 it would be a competitive advantage against much larger companies. #2 investors realize that management of small companies have a hands-on knowledge of its operation and can't place blame on subordinates.
08/19/2005 12:28:03 a) No, I would not support a total exemption. The benefits of internal controls are to significant ignore completely.
08/19/2005 13:49:01 No, in my experience with the compliance efforts with the company with which I am associated, the costs far outweigh the benefits. Certainly, benefits have been derived during this effort in terms of greater adherence to corporate policy, better oversight over transactions, streamlined processes, and most importantly, improved relationships with staff located at the company´s international locations. Despite the fact that the benefits do not outweigh the costs, a total exemption from SOX 404 requirements should NOT be granted. To continue with the requirement of meeting SOX 404 requirements creates a standard upon which investors can rely. The key problem is to get the cost of compliance to be less of a burden, not just to smaller companies, but to all companies.
a) See previous response.
b) See previous response.
08/19/2005 14:40:28 In many instances, the SOX compliance will eventually create a more efficient corporate support function and eliminate waste within a smaller public company. In the short term (1 - 2 years) the costs will definitely outweigh the benefits. Management at many smaller companies is just not aware of the amount of resources need to implement, and more importantly to sustain compliance.
a) Not necessarily. I am an accountant by trade and investor by choice. As an investor, I have greater confidence in a company with a clean SOX report. However, I believe that the level of effort for smaller public companies to acheive compliance will require a great deal of effort over more than one year. Many smaller public companies have not started their SOX implementation. I would recommend a phased-in approach such as the SEC regulations regarding Y2K compliance. In year one of compliance - mandatory disclosure of SOX implementation including: % of completion, $ spent, $ to complete, any potential significant or material weaknesses, status of remediation effort for all significant or material weaknesses.
b) Please see reply above. With enhanced disclosure, the investor would have confidence that management is serious about compliance and progressing towards a successful implementation of adequate internal controls.
08/19/2005 14:50:07 I can't speak to all business sectors, but it certainly does not benefit most small community financial institutions and their shareholders.
a) I certainly would support total exemption for small companies in highly regulated industries such as community banks.
b) No. Most investors in community banks are from the local community and have different investment criteria than institutional investors or serious traders.
08/19/2005 17:03:28 No. For example, smaller companies have segregation of duties issues that they may not be able to overcome without hiring personnel just to satisfy the control requirements. They may also not have the financial strength to support 404.
a) No, just a less stringent version.
b) I think investors would understand because of the resources required to implement 404.
08/21/2005 03:34:34 No. I believe SOX section 404 puts a lot of weight and importance on technical internal controls, which not necessarily beneficial. If there is a fraud, there can still be a fraud together with section 404.
a) I would, as I think the disadventage of SOX Section 404 outweigh its benefits for smaller companies.
b) I don't think investors put so much weight and interest on 404.
08/21/2005 04:46:26 The other way around. The disadvantages outweighs the benefits even without the cost.
b) No. The results of the smaller companies will improve.
08/21/2005 22:19:50 Yes. Although there are arguably benefits of the regulation, the cost of accounting, audit and legal expertise to comply are just too great for a small company.
08/22/2005 14:21:23 No. It is burdensom and removes the ability to adapt quickly to change.
a) NO! Having said what I have said,there does need to be controls in place but I believe some leaway should be extended to smaller companies who do not have the man power.
b) No, I beleive the investor would see the company embracing SOX and at the same time not being burdened with it.
08/22/2005 15:20:23 No. Frequently, there is not enough expertise or depth in a small company to tighten internal controls at the expected level. Again, it is very difficult to control at the top level and having the CFO certifying and accountable is the most effective control.
a) Yes. As mentioned above, in a small company the CFO has a lot of latitude. It is difficult to implement controls that would prevent CFO fraud and financial statement errors because of the lack of depth of expertise. Making the CFO responsible for certifying and making him/her accountable to investors for fraud and errors is the most effective means of controlling the situation.
b) No because I don't believe that Section 404 is providing them much of a safety net anyway. There may be a perception issue, but I don't believe it would be that significant. I haven't seen investor behavior changing as a result of SOX disclosures.
08/22/2005 15:47:02 No. For reasons described previously.
a) No, that's going too far. Shareholders of smaller companies deserve protection too, but it doesn't make sense if a extraordinary portion of their company's resources are tied to the compliance effort. It's almost to the point where we are spending a dollar to make sure that we don't lose 50 cents.
b) Not necessarily. Investors already know that investing in smaller companies involves a higher degree of risk.
08/22/2005 15:47:34 Yes. Smaller companies are generally easier to understand and audit. Material errors are usually easier to spot and the scope of current audit procedures provides a basis for an opinion. While I don't profess this as the avenue of recourse, the auditors malpractice insurance would cover most situations. Why not let the auditor's ability to obtain and maintain malpractice insurance requlate the smaller end of the market. The ability to obtain automobile insurance, for example, has a lot more to do with my driving behavior than the motor vehicle code does.
a) Yes. The cost to achieve compliance is too great. Over time this will result in companies "pencil whipping" compliance. The appearance of compliance will not nesessarily represent actual compliance.
b) No. Investors will understand.
08/22/2005 17:54:28 Section 404 has value, but it is limited. Smaller companies will incur disproportionate costs (as a percent of revenue)and the value of 404 will not be sufficient to overcome those costs.
a) Selfishly, yes. But from a national perspective, this would create a nightmare of monitoring and enforcement among different size companies. I believe the right approach is to develop greatly simplified standards which are easier to implement, and to eliminate most penalties.
b) I think investors whould cheer for any simplification of SOX requirements.
08/22/2005 17:56:59 No. The cost is too high, and a lot of mslaler companies have much simplier financials which cannot be manipulated to present a false picture.
a) Yes, because of cost and distraction, and the issues mentioned above.
b) I do not believe so. Investors in smaller companies are looking at growht and opportunity, as well as innovation.
08/22/2005 19:27:18 No. If management is honest (hence the reason to look at entity level controls), the money is better spend on advancing the top and bottom line of the company.
a) Yes. See above.
b) I think SOX may give people a undue sense of security that small comapnies are a safe investment when they are inherently high risk!
08/22/2005 20:10:17 There are no benefits other than to the accountants who have upped their billable hours substantially. The shareholders and the company are damaged by the substantially higher accounting costs.
a) Yes, or, as I stated previously, a limited version geared to small companies that neither have the staffing or financial resources to comply to the exact requirements that a Berkshire Hathaway or Ford would be required to comply to.
b) I don't think it would have a negative impact. A different class of investors "gamble" on small company and OTC stocks.
08/23/2005 00:42:38 no. see above. the key is that the numbers be right and that company resources be marshalled properly. there are more than one way to get the numbers right.
a) yes. again, the objective should be to make sure the numbers are right. the market appropriately punishes those that don't. small companies are less likely to have the hidden accounting issues a large company would - and this is where most restatements come from.
b) don't believe so. if this is the case, then they should not invest in smaller companies. small companies should be fairly easily understood given their lower complexity.
08/23/2005 09:50:27 I do not think so.
08/23/2005 15:56:30 no. Costs far outweigh benefits.
b) No. The market already undervalues smaller companies.
08/23/2005 16:06:08 I am not convinced the benefits of 404 outweigh the costs for large corporations. The costs for small organizations are exponentially larger.
a) Yes -
08/23/2005 16:49:34 No
a) Yes - Especially for Companies with less than $50-75 million capitalization
b) Probably not
08/23/2005 18:10:00 The testing burden is high. Documentation and attestation on the design of controls is beneficial. Need to find a way to reduce the testing burden.
a) Yes. Again, please consider the Capital Asset Pricing Model which adds a premium for small cap stocks. Investors are compensate for risk. Also microcaps represent a small portion of total market cap. Smart investor are diversifying their investments, so even if an individual small cap were to fail, the overall impact on the investors portfolio should be small.
b) No. We need to encourage capital formation and risk taking to generate new economic entities. Why force small caps to forfeit all profits for SOX compliance efforts. Also, small public companies still face a financial audit.
08/23/2005 21:11:03 No.... see the multiple statements above. SOX does not scale downwards.
a) A total exemption is likely not the answer. However, achieving a standardization of key activities that must be controlled, making compliance with those controls achievable at a reasonable cost, and eliminating the abritrary and variable nature of public auditor interpretations would be most helpful
b) Unknown. Exemptions are not likely to degrade invetor interest or perceptions beyond "pre-SOX" levels.
08/24/2005 08:50:18 If you revised the requirements per my answer in 10. absolutely. There are some benefits like holding management accountable for the controls and ethics, but it goes very far overboard when you look at the impact across the entire organization.
a) No - as I mentioned there are benefits to both the Company and to investors
08/24/2005 10:14:02 No. Small businesses such as ours are not complex and the basic review by iindependent accountancts is adequate to assess our internal controls and detect fraud. Therefore, any more expensive or time consucming review does not benefit the company or the shareholder.
a) Absoloutly up to certain limits on reveneue or market cap.
b) no. I believe investors recognize greater risk of investment in smaller companies just becasue of their nature and position in industry. The fact that eloaborate internal controls are not applied is not likely to be an added risk factor.
08/24/2005 11:28:21 No. A small company will not be able to meet compliance with Sec 404 without significant invementment in resources - these resources are duplicative and do not add to the operating efficiency of the business.
a) This really depends on the how "smaller companies" are going to be defined. I do not believe a total exemption is the right answer since at some point, the smaller company will become a larger company and will have to comply. There needs to be a scaled down version of Sec 404 for smaller companies and then a transition period as they grow into a larger company.
b) I believe it would if it were a complete exemption. A scaled down version would still provide some level of comfort to the investment community.
08/24/2005 12:24:07 Yes, we spent about 5% of revenue on first year compliance, with minimal benefit.
a) No, but dramatically minimized to a few critical controls.
b) Probably not, as the CFO and CEO still must certify the financials.
08/24/2005 14:30:13 Too early to tell. We are in our first year of work and the costs for a company of our size (70 employees) will be between $750K to $1M for all the work (internal, external and systems).
a) No, I think there needs to be some work of SOX 404 for every company.
b) Doubt it.
08/24/2005 16:19:27 No, explained many times above. It is much to costly and has very little value.
a) YES, absolutely. We just don't have the money or the resources that the bigger firms have and it is just too costly. There jsut is veryu little benefit. I beleive that your killing the young auditors who spend so much time doing tests of transactions they don't know any accounting any more.
b) They could care less. They only care about making money. Very little of them care about 404.
08/24/2005 16:26:56 This is difficult to determine given the relative infancy of SOX, though our perception is that costs outweigh the benefits.
a) Yes. The market could price in the absence of SOX 404 compliance, which we believe would result in a lower total cost than requiring compliance. Small companies would have the option of complying voluntarily.
b) Although the cost of capital may be higher for companies exempt from SOX 404 compliance, we believe the additional cost would be less than the cost of compliance. If the opposite was true, we suspect the market would have discovered it already and rewarded companies that over-complied under prior regulations. We are not aware that this has happened.
08/24/2005 16:51:40 No. I truly believe that in smaller companies it makes sense for the Board to consist of the operating people, and the people who created the company are the ones to whom the public looks for success. These individuals who know the company well know whether the financial statements make sense. And if they want to cheat, they will no matter what the legislation.
08/24/2005 16:54:47 NO
a) No, but should delete onerous separation of duties, etc that are impractical in small companies
b) No more than it has always been.
08/24/2005 20:16:09 Yes.
a) Yes, especially for the banking industry which is already highly regulated.
08/25/2005 13:39:06 Absolutely not! BGF is going to spend around $1,000,000 without getting any benefits by becoming SOX compliant. This is a poorly planned bill that is having an adverse impact on small businesses and actually, all businesses in general.
b) No. BGF is prepared to provide our bond holders with the same information they are currently getting via the SEC.
08/25/2005 15:23:41 No, SOX 404 relies heavily on an internal audit function, smaller companies do not have the staff to make this economically feasible and to then have a competitive advantage in the marketplace.
a) Yes, the size of smaller companies do not allow for the necessary segregation of duties and internal audit process that are necessary with 404. The reliance of the external auditors audits should mitigate any risks of fraudulent information in the financials.
b) No, when a company has a simple organizational structure the review of the accounts by external auditors should suffice.
08/25/2005 16:04:36 The benefits of SOX 404 are restoring investor confidence. For any given company, large or small, the costs likely outweigh the benefits, but in the grand scheme SOX 404 absolutely has benefits for investor confidence.
a) No. I suspect that many small companies have significant deficiencies and material weaknesses in their internal controls. Look at how many clean 302 disclosures there were until 404 forced the issue with the larger companies...
b) Negative perception - once it's understood.
08/25/2005 16:26:29 No, the benefits do not outweigh the costs.
a) Yes, do t cost and staffing constraints. In many smaller companies with no operating subsidiaries, the owner/president/executive staff are very much in touch woth day to day operations.
08/25/2005 17:02:43 No. In a truly small business, a significant amount of control is by nature with a small group of senior executives. 404, in my opinon, is going to have little effect on stopping the events (i.e., Enron, Adelphia) that led to its creation. If management of a small business is going to intentionally perpetrate fraud, I don't believe 404 is going to be a deterrant.
a) No; however, I would allow the Board/Audit Committee of the entity significant input into determining which areas of the company's risk exposures warranted a 404 style of control documentation.
b) In today's market, I don't believe most investors are going to wait around long enough to read a controls report or put much creedance in it.
08/26/2005 12:41:42 No. What benefit? The sharteholders of small companies are not sleeping any better at night.
a) I would support a complete exemption from SOX. Basis for the exemption is that a large amount of money and time will be spent on SOX compliance for no value in return. Also a small company or a foreign company would have to be nuts to go public on a U.S. exchange.
b) No. Investors will be satisfied with a traditional audit.
08/26/2005 13:07:22 No, not for small banks given the long standing regulatory regime they operate within.
a) Yes, for small banks due to the regulatory regime they operate within.
b) No, becasue the public is well protected by the regulatory requirements banks must meet and the examinations they undergo by bank regulatory agencies on a regular basis as well as the outside audits required of most banks.
08/26/2005 15:10:01 No. See #3.
a) Yes, if they're already regulated.
b) It would not have a negative effect on companies which are already heavily regulated.
08/26/2005 15:31:29 If the knowledge gained was used appropriately, the benefits will outweigh the costs over a time horizon of 2 years or more.
a) No. Investors rely on financial data, regardless of size.
b) Yes, you should provide investor assurance.
08/26/2005 16:22:08 Probably not.
a) No. Public companies need to have good controls for the capital markets to be confident in them.
08/26/2005 17:28:04 The benefits do not outwiegh the cost. The cost includes management lost opprotunties, additional staff and increased professional fees.
a) I would support modified requirements for smaller companies.
b) No. The present cost is excessive for small companies with little benefit to investors.
08/26/2005 17:46:13 Yes. Too expensisve, too irrelevant, too time consuming.
b) No. I dont think investors really belive the implementation of 4094 for small companies is necessary and proivdes any value.
08/27/2005 11:21:03 Yes. As detailed above, financial statement accuracy is not a primary tool for investors in most small public companies. Whether the controlling shareholders are honest is everything. Even the shadiest of such promoters still want absolutely honest financial reporting, because they know that is where they can go to jail. The fraud that occurs in smaller companies is in the stock trading area, which auditors do zero testing on and which SOX 404 does not address.
a) Yes! Because SOX 404 does nothing to address where all the fraud is: stock promotion and trading. Financial statements are not the prime consideration for investors. Yes, financial reporting is still important, but honesty of the executives and competence of the auditors is what drives this. SOX 404 doesn't address these areas either. SOX 404 is designed for companies that have multiple layers of management, not for little companies that don't. SOX 404 is a 'square peg' in the 'round hole' of small companies. It doesn't fit, it doesn't help, and should be deleted as a requirement.
b) No. If you want heightened investor interest on small companies, do more policing (and do it more promptly) on stock trading anomolies.
08/28/2005 17:59:58 No.
a) Yes. As a representative of a company that has consistently been prudent and conservative in its financial controls, I find SOX has provided no value while adding cost. We would do nothing different than what we are doing today if SOX did not apply to us.
b) Just the opposite. I believe our investors would react positively.
08/28/2005 23:37:43 No. The cost of compliance is nearly an insurmountable problem for smaller public firms.
a) Yes. The sharholder reporting requirement (which has not been raised of indexed since 1964) should be raised from 500 to 2,000. Also, the market capitalization reporting limit shoudl ber raised from $75MM to at least $500MM.
b) No. Audited financial statements are still required. Current civil and criminal laws are more than adequate to assure compliance with proper financial reporting.
08/29/2005 07:07:37 a) I would support a total exemption.
08/29/2005 10:21:15 No, particularly in a small company with a concentration of ownership control. It is already in the company´s best interest to follow the rules and remain ethical. Also, the fact that upper management is heavily involved in the day-to-day operations helps promote and ensure ethical behavior and proper oversight without having to spend significant amounts to have external auditors test such processes.
a) Yes. We believe it would once again allow small companies to be more competitive by easing the continuously escalating general expenses and focus in on their core business, which helps increase shareholder value. Also, we are not convinced that the internal control report has a significant impact in a low cap market like it potentially could in a large cap market with significant market activity.
b) While it may prevent certain investors from investing in small companies, small companies wishing to significantly grow in the capital markets could voluntarily comply with SOX 404 if the company believed it would provide them some benefit to do so in order to grow.
08/29/2005 10:21:25 No, particularly in a small company with a concentration of ownership control. It is already in the company´s best interest to follow the rules and remain ethical. Also, the fact that upper management is heavily involved in the day-to-day operations helps promote and ensure ethical behavior and proper oversight without having to spend significant amounts to have external auditors test such processes.
a) Yes. We believe it would once again allow small companies to be more competitive by easing the continuously escalating general expenses and focus in on their core business, which helps increase shareholder value. Also, we are not convinced that the internal control report has a significant impact in a low cap market like it potentially could in a large cap market with significant market activity.
b) While it may prevent certain investors from investing in small companies, small companies wishing to significantly grow in the capital markets could voluntarily comply with SOX 404 if the company believed it would provide them some benefit to do so in order to grow.
08/29/2005 11:21:29 No, Sox documentation can find areas that may not be efficient or have a lack of controls but there are other ways to find these areas (i.e. internal audit). What SOX does is take away vital resources from operations and puts more money in the pockets of external auditors and consultants.
a) Yes, becuase of the above reasons. What SOX has done is punish small companies that had nothing to do with the Enrons of the world. Would you punish all taxpayers because Bill Gates cheated on his taxes by making the little guy turn in receipts for every transaction and making sure his or her spouse approved of the transaction?
b) Not much of an impact, smaller companies such as ours have limited investor base. Financial statements of small companies tend not to be as complex as some larger ones. Also investors invest in a company for different reasons. People may invest in our company not only for returns, but because its a local company or the hometown bank. If we are exempt from SOX, we may be more efficient and more attractive to investors.
08/29/2005 14:18:47 I do not believe the costs outweigh the benefits. I don´t consider a system of internal controls to be a total immunization against black-hearted managers, but I think that they do promote organizational effectiveness and an ordering of priorities that keeps shareholders´ interests at the top of the list. There may be some near-term sacrifice in terms of costs, but very often, small firms aren´t the most profitable in the first place. Should investors´ interests be sacrificed to improve a few quarters´ costs? I would say they shouldn´t.
a) Absolutely not, for the reasons cited above.
b) An exemption would negatively affect investors´ interests, and would imply that the internal control systems of smaller firms are fine - when in fact, there´s no telling that they are. In fact, the preponderance of the SEC´s actions against firms seem to be smaller firms (see the Accounting and Auditing Enforcement Releases), which indicates that small firms might be the ones with control problems. An exemption would also send the message that if a special interest group lobbies hard enough for an exemption from a rule, they´ll get their way, even if it doesn´t make sense. Furthermore - why should large firms be happy about an exemption for small firms? It´s inequitable.
08/29/2005 14:53:30 No. I believe I already answered this question in my answers to the above questions.
a) Yes. Please see my answers to above questions.
b) Not to this investor. Because the success or failure of most small companies has very little to do with the accounting procedures or the internal controls covered by Section 404.
08/29/2005 15:31:21 I do see some benefits of the process, but at this time, I believe the costs far outweight these, especially since our company is a Bank which is already subject to detailed regulatory examinations. Our bank has tripled the amount spent on internal and external audit, as well as internal personnel costs associatied with SOX 404 compliance.
a) I would definitely support an exemption for Banks because of the level of current regulation and examination. I also think the documentation and testing burden should be reduced for small companies, but not completely eliminated.
b) Investor interests are more swayed by a company's earnings performance than regulatory compliance, thus I do not see exemptions as having a great impact.
08/29/2005 16:10:53 Not at all ---as mentioned above-- This is another one size fits all questions. Look at the appropriateness of the types of companies and strengthen unregulated company reviews and procedures.
a) Yes ---as mentioned above
b) Not at all with regulated companies
08/29/2005 16:20:53 No, as I'm not sure what the benfits are to 404. As a financial institution, we believe the reasons and need for the implementation of 404 are generally met by our compliance with our regulatory agencies.
a) I would support a total exemption for samller companies that are regulated by the financial industry (ie. Office of the Comptroller of the Currency, FDIC, etc.) However, I do believe a significantly scaled back version of 404 requirements would be appropriate for most smaller companies.
b) No, because financial institutions' financial information is readily available to the public in the Uniform Bank Performance Reports and presently in their quarterly reports and annual report.
08/29/2005 17:09:27 No. As a practical matter, most smaller companies will spend considerably more to comply with SOX 404 than the benefit that shareholders receive from the comfort level SOX is intended to provide.
a) Yes. I would support an exemption based upon size and where the company is otherwise highly regulated.
b) No effect.
08/29/2005 17:12:26 As it currently stands I do not think the benefits outweigh the costs. With some easing of the requirements and longer implementation periods it should come back into balance.
a) I would definitely support some exemption or coordination of bank holding companies who already are highly regulated.
b) I don't think it would have a negative effect on bank holding companies as investors already are aware of the fact that bank holding companies are highly regulated.
08/29/2005 17:12:43 No. While some efficiencies and asset protection will arise from looking inward more closely in an organization, the time and resource drain could hamper focus on growing the company and increasing shareholder value.
a) Yes. The Act is intended to focus more scrutiny on large corporations where fraud has taken place and the officers have committed fraud since they had millions or billions of personal wealth at stake. The larger corporations have less of a burden in that they have more internal compliance resources and more earnings to absorb costs.
b) No. I believe they would expect less risk in smaller companies.
08/29/2005 17:36:32 Absolutely. Again it boils down to cost!
a) Yes. Mainly because of cost and time.
b) Not in our case. Investors realize that smaller companies need to guard their cash
08/29/2005 19:02:32 No. most small companies don't need 404 for control until they get to a size where management is no longer hands on.
a) Yes, until management is no longer hands on daily control by participation is sufficient.
b) Perception may change, but if management is bent on fraud there is no protection for investors interests.
08/29/2005 19:05:24 For smaller companies, the combined cash and opportunity costs of SOX 404 significantly outweigh the benefit provided to investors. A total exemption from the SOX 404 requirements for smaller companies is not needed nor desirable. We believe a preferable solution is to narrow the rules to focus on controls related to those risks most likely to cause a significant loss to investors. The current Section 302 and Section 906 certifications (which we would suggest integrating into a single certification), combined with an annual evaluation and attestation related to tone at the top controls, would provide significant benefit to investors while limiting the cash and opportunity cost incurred by the company.
a) As explained above, we believe a streamlined approach is preferable to a total exemption from the Sox Section 404 requirements.
08/29/2005 21:00:01 No. When it costs the slightly more for a company with no product revenues and only 165 employees the same amount as an international, $250m, 1,500 employee, profitable manufacturing company, then no, the benefits do not outweight the costs. Strong internal controls can exist in a smaller company and can be of a more informal nature. For example, auditors require evidence of meetings and decision making processes in order to audit certain controls. This makes meetings more burdensome, substantially increases paperwork and administration, and delays certain decisions. This is a small example of a requirement resulting in no benefit.
a) I don't think a total exemption is appropriate. Rather a scaled down SOX requirement would be more appropriate in order to appropriately address the risks associated with a small company.
b) I don't think there would be a negative perception, rather a slighlty higher risk profile. Smaller companies have a higher risk profile already since they are typically either not profitable, low growth, start-up's, etc. The lack of SOX requirements would increase the risk, but the increase as a percent of total risk would be negligble due to the other risks associated with small commpanies.
08/29/2005 22:40:58 No they do not. The first concept you learn when studying internal controls is the relationship of "cost versus benefit", you do not implement controls if the costs outweigh the benefit. No small company would voluntarily pay the high costs of compliance for SOX based on the lack of beneifit to their business. The costs can range as high as 2% of revenues or higher.
a) Yes I would support a total exemption of SOX 404 for small companies. It really is the most common sense answer based on the high compliance costs, and NO tangible benefit. Total exemption from SOX for small companies is the right answer.
b) No. Investors in small companies understand the higher risks involved and are willing to accept this risk for higher returns. SOX 404 compliance costs reduce the ability for smaller companies to generate higher returns for their investors.
08/30/2005 15:04:16 The rules for smaller companies are too onerous and therefore expenses will be increased to "meet the requirements" but provide little or no value to the organization and its investors.
a) Absolutely, the prior regulatory rules are adequate for smaller companies
b) No, investors will not choose to invest in a company based on whether Sarbanes Oxley rules were exempt or applicable
08/30/2005 15:07:00 Definitely not.
b) I don't believe so. A different type of investor tends to invest in smaller companies than those investing in larger entities. They are less risk adverse by their nature and tend to do more research.
08/30/2005 16:27:18 NO! Please see above remarks.
a) Yes, particularly companies below $250 million market cap. Cost of compliance.
b) No, they realize the burden of such regulation.
08/30/2005 17:08:46 The benefits of SOX Section 404 compliance often consist of better internal control documentation, testing and compliance with governance standards. As noted previously, the benefits of SOX Section 404 compliance are not readily measurable or quantifiable, while the costs are quantifiable.
a) Believe that assessment of governance controls should be required of all public companies. Otherwise, believe that smaller companies should be exempted from all other portions of SOX 404 requirements.
b) Do not believe that such an exemption would have a negative effect on investors. Many if not most investors doe not understand SOX 404. Also, the recent disclosures by large companies of significant or material internal contol weaknesses do not appear to have had a negative impact on the values of the stock of larger public companies.
08/30/2005 17:23:36 No, I don't think the benefits will outweigh the costs. With a total staff of 40 and office staff of 9, we are spreading out our job duties as much as humanly possible. The cost of outside consultation to get through the 404 project will be tremendous for our company, not to mention the cost of the audit itself.
a) Yes, I would support total exemption. The financial annual audit and quarterly reviews already address our internal control to our board's satisfaction, our banker's satisfaction, and to our investors satisfaction. Our office staff already have full-time jobs. We are really straining our resources by being subjected to the requirements of SOX 404. Also, it still seems very unclear exactly what the requirements will be for SOX 404!
b) No, I don't believe that investors of a small company will look negatively at an exemption from SOX 404. Looking at our mostly farmer investors, they realize, as with their own business, that you do the best with the resources you are given. That means maintaining the best internal control with the staff that is available.
08/30/2005 18:26:14 For smaller companies, most of which already have an established adequate structure of internal controls in place, the only benefit of SOX Section 404 has been an increased emphasis on documentation. This intangible benefit does not compensate for the extremely high cost of compliance and the potential competitive disadvantage.
a) Smaller companies should be totally exempted from SOX Section 404 requirements. The disproportionate cost of compliance for smaller companies serves as a penalty and provides little compensating benefit. Any impact to the capital markets of exempting smaller companies would be minimal given their relative market capitalization.
b) Investors´ interests would be better served by allocating the extensive resources being exhausted by SOX Section 404 compliance to increasing shareholder value. A positive impact to investors of exemption from SOX Section 404 requirements would be that smaller companies would not seek to terminate registration, or forgo registration entirely, to avoid the prohibitive costs of compliance and the potential competitive disadvantage.
08/30/2005 18:48:02 No, the benefits do not outweigh the costs.
a) No. The costs would drive the small company out of business.
b) Yes, an exemption will have a negative effect on investors' perception. Therefore, the small company would be encouraged to start putting in place elements of Section 404 even before it had grown to the point that it was required to adopt Section 404 totally.
08/30/2005 18:51:48 The costs of compliance are significant in terms of personnel and dollars for a smaller company. Because we don´t have an internal audit function, we are required to use costly outside consultants to do much of the documentation. Our auditor´s fees will increase significantly. We may be required to hire additional personnel. We don´t believe that the benefits of SOX Section 404 will outweigh these costs.
a) Yes we would support a total exemption from Sox Section 404 requirements for smaller companies, for all of the reasons outlined in this memorandum.
b) We don´t believe that such an exemption would have a negative effect investor´s interests, but we can´t speak to their perception regarding smaller companies.
08/30/2005 19:47:16 No. Clearly, the costs of SOX outweigh the benefits. The application of SOX including the level of detail and documentation has done little (if anything) to improve our financial reporting.
a) Yes, we would support a total exemption. Over 65 percent of our stock is owned by two individuals and/or their affiliates. We are not ENRON and do not have tens of thousands of shareholders who could potentially be at risk. Our shareholders are hurt by SOX because they are receiving a lower rate of return as our consulting, legal and audit fees continue to increase.
b) A sophisticated investor would understand the cost/benefit of SOX on smaller companies.
08/30/2005 21:07:56 No, focus should be on core business and accurate and timely accounting and reporting - not SOX. Internal controls already exist and are tested adequately during audits and qtly reviews.
a) Yes, same reason
08/30/2005 21:39:41 No, we do not believe that the benefit of SOX 404 compliance outweigh its costs for smaller companies. As discussed throughout, the detailed implementation of controls for smaller companies has not been established. The external auditors are looking for the same controls at a large company as for a small, which is not congruent. Implementing complex purchasing systems, etc., to meet SOX and not allowing for simple small business controls places unreasonable burdens for small companies. The big firms do not have the flexibility, or the risk tolerance to deal with the requirements of smaller companies.
a) Yes, we would absolutely support a total exemption from SOX 404 requirements for smaller companies (e.g., less than $500 million market cap). While certain of the merits of SOX are important, the detailed level of compliance issues and high costs make compliance overly burdensome for smaller companies.
b) We believe there would be no negative effect on investor interests or perception. Moving to a violation reporting model for the auditors on key soft controls would be all that matters. For example, if the Code of Conduct was not distributed appropriately and not taken seriously enough, then the auditors would have an obligation to inform the Audit Committee and determine if disclosure was appropriate. This would exist only for key soft controls such as whistleblower, code of conduct, board oversight, etc.
08/30/2005 23:57:28 Not believe it would be. Again, smaller companies can be control by closing monitoring of management instead of continously documentation fo SOX 404.
a) Yes. I support. The method of running a small companies is totally different from a Large multi-national company. 404 is appropriate for large companies due to lack of control of top management to low level.
b) I don't think it would be. At present, 404 still not implemented. Investors are still investing in smaller company.
08/31/2005 08:31:59 No.
a) No, we believe the SOX requirements are too stringent for all companies.
08/31/2005 10:19:14 The benfits of SOX Section 404 are benefits to investors in public companies. We do not want another Enron or WorldCom situtaion. The requirements to smaller companies should be reduced and the requirements for non-publicly traded companies should be eliminated.
a) Yes, but only for small companies where the stock is not publicly traded.
b) An exemption for companies whose stock is not publicly trdaed would be appropriate. Investors in such companies are generally accredited investors or other stock sale limits apply.
08/31/2005 10:21:37 No, not for us anyway. Costs, including increased audit fees will approximate ½% of revenue. This cost is unlikely to be recovered through improved controls and efficiency. The costs are a significant detriment to the bottom line.
a) No. SOX brings a beneficial focus on controls. However, the compliance efforts and related audit fees should be scaled back to reduce the financial burden on smaller companies.
b) Minimal effect if any. We haven´t noticed much concern from our investors regarding SOX. The largest shareholders are also management and they are concerned over the cost.
08/31/2005 14:00:12 The cost in cash and management time of Section 404 compliance has outweighed any benefi.
a) Yes. Investors in smaller companies generally understand these companies are perhaps more risky, less sophisticated and do not have the control environment of larger companies. In addition, many smaller companies have substantial mangement ownership ( in many cases above 50%), which already aligns investor and management interests.
b) I do not believe it would. Some of our larger shareholders have questioned the benefit to them as shareholders of Section 404 vs. the cost.
08/31/2005 14:00:16 No - costs are too great. For those companies that are tyring to "do it right". Sox 404 is nothing more than an expensive formality. A better way to encourage higher ethics, etc. is to seeraly punish those companies that are cutting corners! It's unfortunate that all companies are being penalized because of a handful of crooks.
a) Yes! As a company that maintains high ethical standards already, SOX 404 is nothing more than a formalization of a process and standard that already exists. I see no benefit for us.
b) I don't think that investors are really going to change their thought processes simlply because a company has completed its SOX 404 compliance work and got a "passing grade" from its auditors. Investors are going to make their determination based on company performance, management integrity, growth potential, etc. All of those criteria exist whether SOX 404 exists or not.
08/31/2005 14:12:37 Without question, there are many benefits to the focused analysis of internal controls that management must complete to comply with SOX 404. However, the costs in terms of personnel time spent on compliance issues and dollars paid to outside consultants and external auditors are enormous and far outweigh these benefits.
a) We would not support a total exemption from SOX 404 for smaller companies. Investors in all public companies should have information that allows them to evaluate the impact of a company´s internal control environment on their investment decision.
b) We believe that such an exemption would have a negative effect on investors´ perceptions regarding smaller companies. Many smaller companies have internal control environments that are as effective, if not more effective, than their larger company counterparts. However, we believe that the absence of a report on internal controls for smaller companies would signal that the control environment at a smaller company is not as robust as a larger company. This perception would likely result in an investor´s willingness to pay a premium for equity in a larger company (with an accompanying report on internal controls) vs. a smaller company (with no such report).
08/31/2005 14:25:37 For commercial banking SOX 404 is a complete failure in cost benefit. Banks have long been over regulated and SOX 404 is the straw that will break many banks.
a) Banks and many small companies should have a total exemption from SOX. Congressman Mike Oxley and my Congressman Rick Boucher have said that the ramifications on small business was not the intent of the legislation.
b) A total exemption for small companies would have no impact what so ever. If a company does not trade 15,000 to 25,000 shares a day SEC registration and market designation is a joke.
08/31/2005 14:32:46 It depends on the operations of each company. Every company is different. One company can generate $100 million in sales with 30 employees, the next company may take 500 employees to reach the same $100 million. With 500 employees, you could very easily justify an elaborate control structure that needs monitoring. With 30 employees, the design of the control structure could be significantly different. There needs to be more flexibility within the 404 requirements to take into account the differences.
a) If the requirements for being a small company issuer are refined, a total exemption could be supported. There are companies that are, for one reason or another, structured such that they just fall within the guidelines of being a registered company, small or large. If this is the case, do they need to follow ALL of the same rules as a MicroSoft-sized company? Of course not. But the way the regulations are written, a company with 40 employees and one location is under the same regulations as a company with 10,000 employees conducting business globally, with many segments and locations. Is this logical?
b) If structured properly, any company subject to exemption shouldn't have a negative impact on investor's interests. Proven track records of solid performance and returns should outweigh an exemption of internal controls reporting.
08/31/2005 15:19:27 To date I don't beleive so. There are certainly benefits, but I don't feel they outweigh the costs so far. Over the long term as companies can integrate SOX into their culture and reduce the annual costs their might be a better argument for cost benefit.
a) No - partial or scaled back yes - total, definitely not.
b) It would vary. There are always crooks in any business that would try to exploit any potential exemptions, however I think that overall it would be positively received.
08/31/2005 16:05:33 No, We have 542 members and have had 40 trades in over two years that have been mainly family transfers. The cost simply out weigh the benefits.
a) Yes most definitely. Good companies protect their investors. We don't need more government involvement in smaller companies that are in the process of getting on their feet.
b) No because investors should do their due dilegence when it comes to investing in smaller companies.
08/31/2005 16:13:45 No. Smaller companies generally do not have the complexity of accounting and business issues as larger companies.
a) Yes. Smaller companies generally have not experienced the same issues as larger and more complex companies as evidenced by the well publicized scandals. Management of smaller companies are more in touch with their company's operations.
b) No. Investors confidence in smaller companies was strong prior to the initiation of SOX 404. The largest and most publicized scandals and misstatements has been with larger companies and created investors concern. With investor confidence in smaller companies already being good, SOX has not been a benefit to investors in smaller companies.
08/31/2005 16:16:33 14. Also see answer to question #10. SOX compliance is as important to smaller companies as larger companies due to risks involved. Smaller companies should be able to gain efficiencies from the learning curve that resulted in the SOX implementation by larger companies during the inaugural year. The PCAOB could also help smaller companies by establishing standard controls testing or control analysis. Our company is seeing major efficiencies resulting from standardizing the SOX process and learning from our experience last year. This type of information should be shared with smaller companies. The SEC already has the conceptual framework in place in determining reporting requirements between small and large companies. Small companies should not be granted a total exemption from 404 requirements. We would support having a COSO Light or other guidance for smaller companies. From the investor point of view, the risks of a small company are included in the stock price.
08/31/2005 16:29:59 no, costs, costs, and more costs financial and time
a) yes, there is no benefit, it was an over reaction. SOX does not allow US companies to compete better in the world. Doubling the fine for speeding does not decrease the number of speeders it just indicates that there is no enforcement. We must get away from this idea that " Don't worry government is here and will save you from thinking"
b) No, investors are looking at a smaller companies potential for producing salable goods or services not their ability to produce documents and provide gainful employment to additional auditors and outside consultants.
08/31/2005 17:16:33 No. It cost small companies 1.5 to 2 percent or more of sales to pay for 404. How could that possibly benefit the company when they are competing against private companies who have no such requirement. That is simply to much of gross profit.
a) Yes I would. I think section 404 should not be required of small companies. I think the SEC should give some clear guidance to the big four for the testing of internal controls and they should be disclosed after the company and the auditor agree on the path forward.
08/31/2005 17:57:10 No. Ensuring strong internal controls is beneficial but the documentation and testing burden of 404 is too high for small companies at present.
a) I think a modified approach for smaller companies including longer implementation time is appropriate - not a complete exemption.
b) No as investors already have a different impression of smaller companies (e..g, they have already factored this is)
08/31/2005 18:22:30 We believe that the current benefits of Section 404 for certain smaller companies do not outweigh its costs. However, we have observed some benefit of an enhanced internal control assessment process. Therefore, we support an internal control assessment process which would be much more scaleable than the current requirement.
08/31/2005 18:23:08 No, the benefits do not outweigh the costs. There is too much time on form over substance, less time on operational improvements. Smaller companies need to be able to focus on important/key controls.
a) No, there are portions that are good (entity level controls), but moderation and scope appropriate for the size of the company should be balanced.
b) Not sure. An investor is making a riskier choice with a small company, but there may also be a perception of lacking controls without some coverage of SOX
it just does not need to be full blown annually. If the components of the assessment were rotational, then the company could disclose what was reviewed and what by category is being assessed to and should always disclose known material weaknesses and/or significant changes in the control environment. Also, I think all of the negative SOX publicity has also numbed investors
for many it´s a mute point. For those not immediately impacted by SOX, they may not have the technical knowledge to truly and fully understand what all SOX means.
08/31/2005 19:16:05 14. The answer once again is no, the benefits of SOX 404 do not out weigh the cost for small companies and they should be exempt. When the officers of a company certify that the financial statements of a small company are correct they are taking on a significant civil and criminal risk. Many small companies are using very specialized procedures to minimize risk that need to evolve faster than the regulatory procedures can keep pace. Certifying the system in a simple and specialized system should be adequate.
08/31/2005 20:55:07 There are no benefits of SOX on a small company just lots and lots of wasted resources and money.
a) Yes I would because there is no value and there are no benefits.
b) No because the only thing an investor will see is higher costs, lower bottom line, missed targets(due to de-focus) and lower shareholder value.
09/01/2005 00:55:31 No - it's overkill!
a) Yes, based on the rleatively small impact to the overall public sector
b) It may. This could be addressed in the "risks" section of public filings. If a small company wanted the "extra" credibility of a SOX 404 filer due to an anticipated capital raise, etc, a SOX 404 "opt in" provision could be adopted. Thus filing would be voluntary or applicable for only specific types of transactions.
09/01/2005 11:40:19 no, the costs are just too large as a percentage of business in smaller companies.
a) yes, I think the cost is not bearable for smaller companies.
b) Not sure
09/01/2005 14:30:54 We see little benefit to SOX for small companies, so we believe the costs completely outweigh the sought after benefits.
a) Since there is little benefit to SOX requirements for smaller companies, exempting them would be a boon to both the companies and their stockholders. There are ample precedents for small companies being treated differently than large ones. A sales level test would be the best way to define size because larger sales can support higher costs.
b) Most smaller companies have fewer employees, fewer locations and less complicated transactions, resulting in less risk of accounting fraud that would not be discovered in standard audit procedures. The audit procedures performed on these smaller companies in the past have typically not relied on controls but have focused on specific material transactions, cutoff procedures, revenues recognition and balance sheet account verification and valuation. Investors already have certain negative perceptions of smaller companies, which generally have more business risks because of their size. These risks far outweigh the control risks with which SOX seeks to deal.
09/01/2005 17:12:34 NO! SOX is burdensome to smaller companies and has a direct impact on profitability and valuation.
a) Yes it would be appropriate for a certain size. I would suggest under $100 million in sales. These companies have a high risk/reward profile and need to focus on running the business with relatively few critical thinkers. Dofocusing these people on SOX does not generate value.
b) It would not have a negative impact. Investors at this level understand the risks and are looking for a high rate of return.
09/04/2005 07:42:16 Yes. SOX cost for smaller companies are high.
b) No - still legal liability on management and Board are high