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News from U.S. Senator Olympia J. Snowe
Chair, Senate Committee on Small Business and Entrepreneurship
For Immediate Release: May 8, 2006
Contact: Chris Chichester, 202-228-5843

Snowe, Enzi: GAO Report On Sarbanes-Oxley Finds Burdensome Compliance Costs
Senators Urge SEC To Adopt Clear and Practical Regulations For Small Businesses

WASHINGTON, D.C. – Senator Olympia J. Snowe (R-ME) and Senator Michael B. Enzi (R-WY), Chairs of the Senate Committee on Small Business and Entrepreneurship and the Senate Committee on Health, Education, Labor and Pensions, respectively, today released a Government Accountability Office report they requested on the impact of the Sarbanes-Oxley Act on small businesses. The report found small business compliance costs for the Act’s internal controls requirements were disproportionately higher than larger businesses, an increase in companies going private to avoid compliance costs, and a considerable increase in audit fees since the passage of the Act, which include hiring more staff or paying for outside consultants.

“As Chair of the Senate Committee on Small Business and Entrepreneurship, I hear from small business owners in Maine and across the nation who struggle to comply with an ever-increasing list of statutory and regulatory requirements. Senator Enzi and I requested this Government Accountability Office study to determine the burdens that the Sarbanes-Oxley Act may impose on small business owners, which include harming their ability to obtain capital,” said Senator Snowe. “While I believe in ‘right sizing’ regulations, this report leads me to caution the Securities and Exchange Commission against creating complex and cumbersome regulations that have the potential to place small businesses in a paralyzing state of regulatory limbo and damage their ability to create jobs. Instead, I urge the SEC to adopt clear, unambiguous, and practical rules.”

“I joined Chairwoman Snowe to request this report because small businesses are the primary force behind the American economy. They employ millions of American workers and keep our economy growing and productive. Yet, the same small companies are hit hardest by the cost of regulatory compliance. We need to look for ways to lessen the impact of Sarbanes-Oxley implementation on these companies. This report serves to highlight that point,” Enzi said. “I was an author of the Sarbanes-Oxley Act and I believe that it was necessary to restore confidence in our public markets. It remains necessary to ensure that such confidence is well-earned, but we need to find a way for small companies to implement the Act, including the strengthening of companies’ internal controls. Doing so will benefit investors and businesses alike.”

Senator Snowe and Senator Enzi noted a central recommendation of the report, Sarbanes-Oxley Act: Consideration of Key Principles Needed in Addressing Implementation for Smaller Public Companies, urged the SEC to consider the “size, the unique characteristics of smaller public companies and the knowledge base, educational background, and sophistication of their investors” during the implementation of Sarbanes-Oxley requirements. It found smaller public companies face compliance costs disproportionately higher (as a percentage of revenues) than large public companies, particularly with respect to the internal control reporting provisions in section 404 and related audit fees.

Excerpts from the report:

* “Smaller companies that responded to our survey reported that their CFOs and accounting staff spent as much as 90 percent of their time for the period leading up to their first section 404 report on Sarbanes-Oxley Act compliance-related issues.”

* “Public companies with market capitalization of $75 million or less paid a median $1.14 in audit fees for every $100 of revenues compared to $0.13 in audit fees for public companies with market capitalization greater than $1 billion.”

* “The number of public companies that went private has increased significantly from 143 in 2001 to 245 in 2004, with the greatest increase occurring during 2003.”

* “For smaller public companies, the costs of complying with securities laws likely required a greater portion of their revenues, and cost considerations (indirect and direct) were the leading reasons for companies exiting the public market, even prior to the enactment of the Sarbanes-Oxley Act.”

* “Smaller companies reported paying fees to external consultants for the period leading up to their first section 404 report that ranged from $3,000 to more than $1.4 million.”

* “Smaller public companies may have found it harder to retain a large accounting firm as a result of increased demand for auditing services, largely due to the implementation of section 404 and other requirements of the act, and the capacity limitations of the large accounting firms.”

* “From 1999 through 2004, IPOs by companies with revenues of $25 million or less decreased substantially from 70 percent of all IPOs in 1999 to about 46 percent in 2004.”

Senator Snowe and Senator Enzi said the Securities and Exchange Commission has extended the date by which companies with less than $75 million in market capitalization must comply with Sarbanes-Oxley to July 15, 2007. The SEC also formed an Advisory Committee on Smaller Public Companies in response to the concerns of small business owners. On March 3, 2006 the Committee issued a draft of its final report for public comment that contained recommendations that would exempt 70 percent of all public companies from all or some of the internal controls mandated by Sarbanes-Oxley.

“Congress passed Sarbanes-Oxley, with my support, to deter criminal behavior by corporations and their accounting firms. While I support the Act’s mission of increasing accounting accuracy and transparency, I believe the Securities and Exchange Commission must implement it with due regard to the size and resources of small businesses,” said Senator Snowe.

The report is attached.


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