US GAO report on SOx impact on small public companies

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09 May 2006

A report prepared by the United States General Accountability Office (GAO) found that small public companies (defined as market capitalisation under US$700 million) incur a disproportionate cost of compliance to implement Section 404 of the Sarbanes-Oxley Act of 2002 (internal control reporting) compared to large companies.

GAO suggests that this may have been one factor in the reduced number of IPOs, increased number of companies 'going private', and shift among small companies from use of the largest audit firms, to mid-size and smaller audit firms. Examples cited in the report include:
  • Of the companies that reported implementing section 404, public companies with market capitalisation 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 capitalisation greater than $1 billion.
  • 81% of the small public companies that responded to the GAO survey had hired a separate accounting firm or consultant to assist them in meeting Section 404 requirements. Services provided included assistance with developing methodologies to comply with section 404, documenting and testing internal controls, and helping management assess the effectiveness of internal controls and remediate identified internal control weaknesses. These small 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.
  • The number of public companies that went private has increased significantly from 143 in 2001 to 245 in 2004, with the greatest increase occurring in 2003.
The report includes recommendations for both SEC and PCAOB consideration, and comments from both of those organisations. Click to (PDF 1,012k), which is titled Sarbanes-Oxley Act: Consideration of Key Principles Needed in Addressing Implementation for Smaller Public Companies.

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