The Sarbanes-Oxley Act was the government”™s attempt to avoid another Enron debacle. But since its inception in 2002, it is now seen as an added and costly layer to any business that must comply with it.
In December, the U.S. House of Representatives passed an omnibus financial reform bill that included an amendment to exempt small companies from the Sarbanes-Oxley (SOX) requirement of having to obtain an external audit of their internal controls on financial reporting. It now needs to be taken up by the U.S. Senate, whose makeup changed last week with the election of Republican Scott Brown in Massachusetts.
Any public company or bank with more than $75 million in assets is bound by its lengthy list of compliance requirements.
The most costly and cumbersome of its regulations for small business is Section 404, which requires the use of an outside auditor for companies that are publicly traded; the repeal or revision of which has been the mantra among several lawmakers and has worked its way on to the Supreme Court”™s calendar.
“The lawsuit now pending before the U.S. Supreme Court says the Securities and Exchange Commission overstepped its bounds in establishing a public service commission oversight board,” said Dan Rothstein, counsel for Provident Bancorp. “It is consistent with the major issue ”“ federal regulation of accountants that never existed before. That doesn”™t get a lot of press ”¦ the auditors are now audited, and it affects how they conduct their business. It also separated the consulting profession from the accounting profession. The lawsuit says those provisions are unconstitutional.”
Provident Bank first came into compliance with SOX in September 2005.
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“It was an extremely expensive endeavor, more than seven figures, along with many internal man-hours to get it accomplished,” Rothstein said. “Certainly, some good came out of it to assess risks and controls, but given the amount of time and the expenditure, we don”™t believe it was a worthwhile undertaking for many public companies; it has led to much misunderstanding and overreaction that was unnecessary. SOX didn”™t solve the problem it was meant to, but it did have some positives.”
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The cost to comply with SOX has been a sore point among New York state business owners and commercial banks. Companies who complied with Section 404 two years after it was signed into law with less than $100 million in revenue spent an average of 2.5 percent to fulfill their obligations.
John Russell is chief operating officer for the First National Bank of Jeffersonville, one of the region”™s banks that falls under SOX regulations.
“We”™re in the category where we had to have an external audit, but currently, we don”™t. We still have to go through the testing. Our market capitalization dropped below the $75 million of market capitalization.”
“We paid an initial $500,000 to implement SOX; we did it for 2005 financial statements, and the costs leading up to it were in the neighborhood of $700,000,” Russell said. “The year after that, we switched to a smaller accounting firm to save money and did save approximately $50,000 in 2006. From 2007 on, the cost has been roughly $60,000 a year just for the external audit. We already have two internal auditors who spend half their time dong the testing; our other employees spend a decent amount of time ”“ it hard to quantify the man hours.”
Under the current financial reform bill making its way through Congress, there is a provision to exempt companies and banks such as Jeffersonville from having to comply with many of SOX”™s provisions.
“As of 2010, any company with $25 million or more of assets will have to comply, which would mean we would have to hire external auditors for our testing,” Russell said. “The SEC postponed implementation. Congress passed the reform bill; we are waiting to see how it is handled in the Senate.”
Russell said banks in general were way ahead of the curve before SOX was enacted and were already heavily regulated before it came into play. “Many of the regulations were already in place just for a regular financial statement audit.”
He commended Congressman John Hall (D-Dover Plains) for voting for the financial reform legislation and for refusing to remove the Kanjorski Amendment, which relieves companies and banks under $75 million in assets of the mandate of an external audit.
