From: Paul Dauber
Dear Sir or Madam:
We appreciate the opportunity to comment on the impact of the Sarbanes-Oxley Act of 2002 (the "Act"), with particular attention to Section 404 of same. In order to provide context for the comments that follow, I will point out that we are a publicly traded company on the Nasdaq national market with 2004 annual revenues between $60 million and $75 million. We recently filed our Form 10K and concluded the Section 404 process with no material weaknesses identified by either ourselves or our external auditors. We strongly believe in the spirit of the Act and feel that investor confidence in the integrity of issuing company's financial statements is perhaps the key element to the ongoing success of the financial markets. That being said, it is our belief that, from the perspective of a small issuer, the benefits achieved by compliance with Section 404 of the Act are far outweighed by the costs, both internal and external, associated with such compliance. For example, in our case, the fees paid to external consultants and auditors in connection with the 404 process were well in excess of $1,000,000. This figure does not take into account any fees associated with our routine annual audit or the time dedicated to the project by internal resources -- including both management and the Board of Directors. For a company of our size, an expense figure such as this is simply not workable. Further, it is our view that the compliance costs for smaller entities such as ourselves are not demonstrably different than that of organizations many times our size. As such, small to mid-cap companies bear a disproportionate burden in compliance with the Section 404 of the Act.
It is notable that the majority of our comments relate to Section 404 of the Act. We believe that, save for Section 404, the requirements of the Act are very workable and assist in the creation of good business practices. However, Section 404 is a different story entirely. The level of detail required for compliance with Section 404 is astronomical and results in enormous costs. Further, based on conversations with colleagues at different companies, we believe that the application of the rules has been inconsistently applied by the various audit firms. As such, despite the excessive costs associated with compliance, a primary goal of Section 404, ensuring that proper controls and are in place and disclosed to the investing public, is applied unevenly from company to company.
We believe that refinements to the current system should include some type of tiered approach whereby smaller issuers would not be subject to the same stringent requirements that Section 404 currently imposes. The Commission needs to better appreciate the challenges of emerging companies and recognize that, while solid corporate governance is key for every publicly traded company, there is a point of diminishing returns - especially as this concept relates to Section 404. It is our view that the vast majority of benefits from this legislation, perhaps as much as 80%, can be achieved in approximately the first 20% of effort expended on the process. Thereafter, the significant cost and effort associated with full compliance yields little incremental value to the investing public. Further, we believe that not only is compliance with Section 404 a large financial burden that yields a proportionally small investor return, but it may also lead to smaller companies being unable to retain auditing firms. We have noticed a recent trend where "the Big 4" are dropping smaller issuers given what they perceive is an unacceptable risk profile, as well as a basic shortage of available resources within the "Big 4" given the dramatically increased workload. Of course, once this happens, any perceived risk is magnified given that such companies are no longer able to retain a "Big 4" audit firm to validate their financial statements. We believe this to be an unanticipated result of the legislation that will dramatically impact small issuers.
In summary, we wish to reiterate that we share the spirit of the legislation and agree with a majority of the practical applications. However, certain elements of same - notably Section 404 - are prime examples of the law of unintended consequences whereby benefits accruing to investors will not be remotely in line with the costs expended by companies to achieve same.