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Sarbanes-Oxley and Antifraud: Does Section 404 Help Small Companies?
The deadline for Sarbanes-Oxley compliance is approaching small businesses rapidly. While it looks like the Act will be around for a while, experts continue to debate whether or not compliance really helps reduce fraud. Does complying with Section 404 really help companies reduce the risk of fraud? Further, even if Section 404 does help reduce fraud, there is grave concern as to whether the cost is worth it. In the current regulatory environment, small publicly traded companies are faced with a twofold task. First, compliance with Section 404 is mandatory. Additionally, though, small caps do need to develop appropriate fraud mitigation controls to protect their businesses. The result is a dual controls development burden for the companies that can afford it least. This article will explore the challenges of building an anti-fraud control framework for compliance while actually reducing fraud. The deadline for Sarbanes-Oxley compliance is approaching small businesses rapidly, and the Act looks like it will be around for a while. Despite the fact that publicly traded companies are complying with the act (large companies now, companies with market caps under $75 million by July 20061), experts continue to debate whether or not compliance really helps. Section 404 receives specific focus in this discussion across the industry. Does complying with Section 404 really help companies reduce the risk of fraud? The SEC and PCAOB have emphasized the benefits of compliance from the inception of the Act, paying particular attention to the protection of shareholders. Many auditors claim that complying with the Act represents an opportunity to generate a return on investment. The efforts of government agencies and independent auditors to demonstrate the value of Sarbanes-Oxley compliance does not represent consensus. The SEC Advisory Committee on Smaller Companies exists to address the concerns of small publicly traded companies. While most public policy is created based on the needs of higher profile companies (such as the Fortune 500), companies must take measures to ensure that small companies understand the impact of policy and legislation on them as well. Recently appointed to this advisory committee, Alex Davern2 disagrees with the perception of the auditors and government agencies in regards to Sarbanes-Oxley. As the CFO and Senior Vice President at National Instruments,3 Davern understands the accounting context that makes Section 404 so cumbersome for small companies. An advocate for reasonable compliance requirements for small companies, Davern is not convinced of the effectiveness of Section 404 in reducing the risk of fraud in small companies. Davern asserts that Section 404 will be ineffective in reducing fraud at small public companies.4 Because of the high cost and complexity of compliance, ambiguity of control standards, and difficulties with materiality, Section 404 will offer much less protection than it costs. [continued...] Want to know more? Download the White Paper "Sarbanes-Oxley and Antifraud: Does Section 404 Help Small Companies?" for just $29.95. |
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