Sarbanes Costs Higher Than Forecast, Study Says

A report by congressional auditors found that the costs for public companies to comply with a 2002 anti-fraud law had been higher than anticipated, providing ammunition to business interests that have been complaining about the law’s effect.

At the same time, though, the report by the Government Accountability Office released Monday raises concerns about the recommendations of an official advisory committee for exemptions from the law for smaller public companies. The scope of the proposed exemptions could damage the investor protection afforded by the Sarbanes-Oxley law that arose from 2002 corporate scandals, the report says.

The two Republican senators who requested the report, Olympia J. Snowe of Maine and Michael B. Enzi of Wyoming, said it showed that regulators must find ways to lessen the law’s effect on smaller companies.

At issue is a key part of the law: the requirement for companies to file reports on the strength of their internal financial controls and fix any problems.

The advisory committee, appointed by the Securities and Exchange Commission, formally proposed last month that the agency exempt smaller companies from the requirement -- a move that would affect about 70% of all U.S. public companies.

“This report leads me to caution the Securities and Exchange Commission against creating complex and cumbersome regulations that have the potential to place small businesses in a paralyzing state of regulatory limbo and damage their ability to create jobs,” Snowe said.

“Instead, I urge the SEC to adopt clear, unambiguous and practical small-business rules.”

SEC Chairman Christopher Cox has said the goal should be to make the internal-controls requirement work so that it can apply to companies of all sizes.

The study by the accountability office found:

* For companies of all sizes, the costs of complying with the internal-controls requirement have been higher than anticipated, and they have disproportionately affected smaller companies.

* Many public companies have gone private to avoid having to comply with the requirement. The number of U.S. companies going private jumped from 143 in 2001 -- the year before Sarbanes-Oxley was enacted -- to 245 in 2004, according to the report.

“By any measure ... the companies that went private over the 2004-2005 period represent some of the smallest companies in the public arena,” the report said.

* Audit fees paid by companies have risen markedly as a result of the law.

Lawmakers are drafting legislation to exempt companies with a market value of less than $700 million from complying with the requirement.