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The AAO Weblog covers accounting issues and current events as they relate the practice of investment analysis.

Aug 3

Written by: Jack Ciesielski
8/3/2005 5:32 AM 

A while ago, I noted that the SEC was establishing the "SEC Advisory Committee on Smaller Public Companies" for the purpose of providing balance between the costs and benefits of regulation. This has been a noisy issue in the small company community in the last 12 to 18 months, as smaller firms realized they needed much catch-up work to comply with Section 404 requirements of the Sarbanes-Oxley Act.

Yesterday, the Commission began a fact-finding mission to collect from small companies - and investors - their experiences with the current regulatory framework. There's an online questionnaire for gathering those inputs; the Advisory Committee prepared the questions, not the SEC. And the results from the input are not part of the SEC's regulatory agenda; they're for the benefit of he Advisory Committee.

Many of the questions center on Sarbanes Oxley itself and Section 404. A few samples:

"Has SOX changed the thinking of smaller companies about becoming or remaining a public company? If so, how?"

"Has the current securities regulatory system, including SOX, increased or decreased the attractiveness of U.S. capital markets relative to their foreign counterparts for companies? For investors? Please explain."

"Does the current securities regulatory system adversely impact or enhance this country's culture of entrepreneurship? Has the current system impaired or enhanced the ability of American companies to compete on a global basis? If so, how?"

You get the idea. The questions are pretty much a reiteration of the general gripes aired so often by smaller firms - who have been extended substantial breaks on reporting already. But wait, there's more. The questions go to the heart of whether smaller companies should even be subject to the same kind of accounting principles as not-small companies:

"Are the current accounting standards applied to all U.S. companies appropriate for smaller companies? If not, please explain what revisions to existing standards might be appropriate."

"For smaller companies, would extended effective dates for new accounting standards ease the burden of implementation and reduce the costs in a desirable way? How would such extensions affect investors or markets? Would allowing a company's independent auditors to provide more implementation assistance than they are able to currently reduce such burdens or costs? Would such a step positively or negatively affect the quality of audits? Please explain."

"Would auditors providing assistance with accounting and reporting for unusual or infrequent transactions impair the auditors' independence as it relates to smaller companies? Would providing such assistance reduce the cost of compliance for smaller companies? What would be the impact on the quality of audits, investors or markets? Please explain."

Yes, it's the advisory board that's gathering this information, not the SEC itself. But in the end, the SEC established the advisory board for the express purpose of having a window into the world of the smaller company, to see how it affects them and how it can provide more effective regulation. You have to worry that the Advisory Board might be a de facto lobbying group, one that has the SEC's ear by birthright. Especially when you see questionnaires like this, which seem to be sympathetic to only one point of view: "regulating small companies is bad."

High irony: if you pay much attention to the SEC's most frequent enforcement actions, they seem to involve - smaller companies. (Like yesterday's post about Microtune, for example.) Which indicates to this observer that small companies have inherent control problems that need to be addressed - instead of being granted amnesty.

Comments to the Advisory Committee are due by August 31.