While reform efforts in Washington D.C. have the financial sector waiting on pins and needles, smaller publicly traded companies and accounting firms in Connecticut also have a lot at stake.
That’s because lawmakers are considering a bill that would exempt publicly-traded companies with market capitalizations under $75 million from having to comply with an accounting rule that requires greater oversight from external auditors over internal controls.
At stake is potentially hundreds of thousands of dollars companies would need to spend to comply with the rule. It’s a potential expense that could be a boon for local accounting firms, but also a drag on small companies already dealing with a poor economy.
In Connecticut, there about 86 public companies with market caps below $75 million, according to the investment banking firm Carter Morse & Mathias.
“As a purest, the idea of having internal controls over financial reporting audited externally is a good thing for investors,” said Ralph Volpe, a partner at the accounting firm McGladrey & Pullen, LLP in New Haven. “But I think this rule comes at a time when capital is better served reinvested in the company rather than in consulting.”
Financial reform bills in both the House and Senate contain language that exempts non-accredited filers, or public companies with market capitalizations under $75 million, from complying with a section of the Sarbanes-Oxley Act that requires an independent audit of a company’s internal controls assessment.
Sarbanes-Oxley was passed in 2002 to tighten oversight and accounting standards over publicly traded companies in the wake of a number of major corporate and accounting scandals including Enron and WorldCom.
Since then, non-accelerated filers have been required to do their own internal controls reporting. But the Securities and Exchange Commission, citing cost concerns, delayed on several occasions the requirement for small companies to have their internal controls audited by outside firms.
Last October, the SEC finally caved in and said the requirement would take effect June 15.
Now companies are relying on lawmakers to exempt them permanently through legislative action.
Supporters of the rule say it is necessary to protect the sanctity of the capital markets.
“If I received millions of dollars from investors, I’d feel like I have a duty to have an independent report that says controls are operating properly,” said Bob Benoit, the president of Massachusetts-based Lord & Benoit, a research and consulting firm. “Perhaps they should have controls audited for the sake of accountability and proper stewardship.”
Should the exclusion become law, Benoit said about 50 percent of all publicly-held companies, or 5,000 businesses, would not be required to have their accounting controls tested by independent auditors. Since each smaller-cap company can receive up to $75 million from stockholders, this exclusion could apply to as much as $375 billion in U.S. investor funds.
Benoit said smaller public companies tend to have riskier control issues than larger ones, which is why they need external auditing.
Benoit also doesn’t buy the idea that it’s too costly either, estimating that it costs small companies, on average, $78,484 to comply.
“Most of the groups that argue that the costs are too high don’t know the costs,” Benoit said. “They throw numbers out there like ‘millions of dollars’ and it’s just not fact.”
If they do become subject to the external review, most non-accelerated filers in Connecticut will be forced to hire consultants and pay an audit fee, which can cost up to $250,000, Volpe said.
That’s money a lot of companies don’t have to spend right now, Volpe said.
Rules like this and public reporting in general, has discouraged private companies from going public, he added.
Scott Trenholm is a partner with the accounting firm CCR LLP in Glastonbury, which audits 20 publicly traded companies in the region. Of those 20 companies, 18 are non-accelerated filers, and all have had the rule weighing on their mind, Trenholm said.
Trenholm said the SEC has not treated non-accelerated filers fairly, because they have decided to postpone implementation of the rule, on several occasions, close to filing deadlines. Companies that are filing financial statements for the June 30 deadline, for example, are in a difficult position because it’s unlikely the financial reform bill will pass by then.
“Firms have started to do the audits and then find out they didn’t need to do it,” Trenholm said.
Trenholm said he’d like to see companies comply with the law because it would be a revenue producer for his firm. But for individual companies it probably wouldn’t be worth it, he said. “I think the cost will exceed the benefit in many cases,” Volpe said.
Benoit disagrees, arguing that complying with the rule can have a positive financial impact because it boosts investor confidence.
