From: James A. Clark
Sent: August 2, 2005
Subject: File No. 265-23

To: The SEC Advisory Committee on Smaller Public Companies

Re: File Number 265-23

Ladies and Gentlemen:

I write to provide a statement for your consideration of the costs and burdens imposed upon smaller public companies as a result of the Sarbanes-Oxley Act of 2002 (“SoX”), most notably Section 404, and whether the costs and burdens are commensurate with the benefits to investors and the public. I respectfully submit the view that the costs and burdens of Section 404 related to smaller companies are not commensurate with benefits to investors and the public.


I am the Chief Financial Officer of Critical Path, Inc. (CPTH) a company uniquely positioned as an early example of the compliance experience awaiting smaller public companies. At December 31, 2004 CPTH had 355 employees, we reported calendar year 2004 revenues of $71 million, total cash and equivalents of $23 million, total assets of $69 million, a net loss and a shareholders’ deficit. Additionally, on June 7, 2005, we received written notification from The NASDAQ Stock Market that our common stock has not maintained a minimum market value of publicly held shares ("MVPHS") of $15,000,000.

Despite the preceding metrics, CPTH is an accelerated filer and was required to comply with SoX 404 for the year ended December 31, 2004. For over 90% of the trading days since the 2002 measurement date, CPTH’s market cap has been below the $75 million level used to define accelerated filers, but there is no SoX mechanism for a re-assessment. As a result, I believe CPTH is a rare example of a company which clearly fits any reasonable definition of a smaller company, but which has lived the experience of complying with SoX 404.

Costs and Burdens:

In 2003, CPTH incurred external audit and related fees just over $600,000. Related to the 2004 financial audit and reports on internal controls, CPTH incurred external audit, consulting and related fees of approximately $3 million. This five-fold increase in compliance expense reaches a level representing 13% of 2004 year-end cash, over 4% of annual revenue and 20% of the NASDAQ required minimum market value. Our research indicates that, for similarly situated companies, this level of cost is in the mid-range of 2004 compliance spending.

Due in part to the previously uncharted nature of the assessment and reporting process, but also due parameters which, I believe, clearly were designed with a mind toward the larger company (with higher dependence on internal controls and perhaps an internal audit function in-place), CPTH took advantage of extensions to file its 10K and its SoX 404 report. Accordingly, the documentation, testing and reporting effort consumed material amounts of internal staff time in F&A and management time in other areas through April 2005. This significant resource requirement conflicted with ongoing business processes such as budgeting and forecasting, collections and reporting.

The implementation of SoX 404 has become highly specialized requiring significant staff education and/or extensive time in the management of consultants. The average expenses of compliance have increased geometrically --- to a material element of expense. We have taken a structured, familiar financial audit and added two (management and auditor) extensive control assessments to the same timeframe of the year – in an environment of shortening SEC reporting deadlines. I believe that the only rational conclusion is that costs and burdens have soared.

Cost-Benefit Relationship

No doubt, there have been benefits to investors and the public related to Section 404 and SoX in general. Many Boards of Directors and management teams have been energized, upgraded and re-focused. Compensation matters have been made more transparent. Auditor independence has been re-emphasized. Entire organizations have been reminded of the importance of standards of ethics. Investor insight into operations has been enhanced. For example, in the case of CPTH, we disclosed four material weaknesses. In many of these areas, the costs and benefits are commensurate. Related to SoX 404, however, I respectfully submit that that costs are not justified by the incremental benefit.

Smaller public companies are differentiated from larger operations in several areas that are well-understood by investors. Smaller companies generally bring an environment of operational innovation and agility to bear on new or smaller markets. Such operations will naturally evolve, generating more infrastructure with growing success and resources. However, given well-known smaller company fundamentals and already existing disclosures such as risk factors, it is readily arguable smaller company 404 disclosures will not be deemed significant to investors.

Smaller company financial audits historically tended to rely on more extensive year-end substantive testing than on interim testing of controls. Smaller companies do not tend to maintain internal audit functions. Smaller companies tend to have less segregation of duties, more shared access to systems and more reliance on outside advice for complex transactions than their larger counter-parts. These standards are factored into investment decisions and risk profiles as a matter of course.

I believe that the costs and distractions of SoX 404 compliance at smaller companies not only are not commensurate with the benefits, but can represent a risk to investors to the extent they consume significantly disproportionate resources.


I suggest that the committee extend the compliance date for smaller companies to allow greater time for consideration of the possibility that SoX should be amended with separate requirements for smaller companies.

For example, if only the management (and not the auditors) of smaller companies were required to provide an assessment and report, significant time and money could be saved. If smaller companies with material weaknesses other than segregation of duties were not required to assess again for three years, but were required to make progress on the weaknesses reported, limited resources would be applied to better investor benefit. If smaller companies with a meaningful internal audit function and a public reporting mechanism on internal audit work were exempted from section 404, investors would benefit. Or, if smaller companies were required to report at the end of their second quarter rather than year end, they might avoid the premium costs arising from more than trebling audit work in what was already called “busy season” by auditors.

These thoughts are provided only to illustrate that there remains room for further creative consideration and improvement in the execution of the good intentions which motivated SoX. And that it is prudent to allow time for these considerations before burdening our important small business innovators as they compete in the global markets.

The time and effort of the committee in the consideration of this statement and of the broad issues facing smaller public companies is greatly appreciated.

Your sincerely,

Jim Clark

James A. Clark
Chief Financial Officer

Critical Path, Inc.
350 The Embarcadero, 6th Floor
San Francisco, California