The reality of the "Law of Unintended Consequences" finally dawned on the Securities & Exchange Commission as it gave a filing extension to small companies trying to comply with the requirements of the Sarbanes-Oxley Act. Companies with a market value of less than $700 million will get 45 days more to get their paperwork in order.
Last month Fool contributor Tom Taulli highlighted the nightmare many small companies were facing in trying to comply with the sweeping mandate of the supposed "shareholder friendly" legislation: compliance costs disproportionately high, IPOs not coming to market, public companies even going private. Bill Mann noted that companies with less than $100 million in revenues could face compliance bills of $500,000 or more and said the law is creating a procedural maze that's difficult to follow.
Under Section 404 of the Sarbanes-Oxley Act of 2002, the congressional "feel-good" answer to the Enron/WorldCom scandals, companies are required to spell out in their annual reports the financial controls they have in place that will prevent a repeat of the accounting fiascos of a few years ago. Their auditors are also supposed to add their own comments.
In addition to the costs associated with compliance, companies have been concerned that even if minor problems are found, they will have to be highlighted, thus creating unwarranted concern among investors. It was also a concern that accounting firms would not have the resources available to audit all the controls by the deadline. Companies have 75 days from the end of their fiscal year to file their annual reports and report their audit results. The extension gives small companies an additional 45-day filing period, which many view as still insufficient considering the complexity of the required task.
In a quick check of some of the Motley Fool Hidden Gems small-cap companies, I found that costs are indeed burdensome: Saucony (NASDAQ:SCNYB) had $415,000 in Sarbanes-Oxley expenses, with revenues of $42.4 million for the quarter; Hooker Furniture (NASDAQ:HOFT) said the 18% increase in its SG&A expenses was primarily due to the new compliance costs; eSpeed (NASDAQ:ESPD) reported that on quarterly revenues of $39.8 million, it incurred Sarbanes-Oxley expenses of $700,000 -- a 70% increase over 2003 attributed solely to compliance! Many of the other Gems had not yet broken out their costs, but were expecting them to be significantly higher.
Not everyone is suffering from the onerous requirements. Like the thousands of lawyers that seem to materialize with the creation of every new law, there are companies that are profiting from Sarbanes-Oxley. Big Four accounting giant Deloitte Touche reported revenues of $16.4 billion, a 9% increase over last year, fueled in part by the compliance business the firm reeled in as a result of the law.
As Will Rogers once quipped, "With Congress, every time they make a joke it's a law, and every time they make a law it's a joke."
Fool contributor Rich Duprey would like to see Congress subject to all the laws it passes. He does not own any of the stocks mentioned in this article.
