GAO Report on Sarbanes-Oxley's Impact on Small Companies
May 09, 2006 at 11:30 AM
The Sarbanes Oxley Act of 2002 was passed in order to improve the flow of accurate information from corporate offices to investors and other interested parties. But SOX, as the Act is called by most corporate attorneys, has created significant headaches for corporate legal departments, particularly for smaller public companies. The Government Accountability Office (GAO) has just released this report about SOX’s impact on companies, and the report concludes that:
costs associated with implementing the Sarbanes-Oxley Act—particularly those costs associated with the internal control provisions in section 404—were disproportionately higher (as a percentage of revenues) for smaller public companies. In complying with the act, smaller companies noted that they incurred higher audit fees and other costs, such as hiring more staff or paying for outside consultants, to comply with the act’s provisions. Further, resource and expertise limitations that characterize many smaller companies as well as their general lack of familiarity or experience with formal internal control frameworks contributed to the challenges and increased costs they faced during section 404 implementation. Along with other market factors, the act may have encouraged a relatively small number of smaller public companies to go private, foregoing sources of funding that were potentially more diversified and may be less expensive for many of these companies.
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