Public Companies and the Sarbanes-Oxley Act


Public companies have come under great scrutiny in recent years, thanks to well-publicized corporate scandals in 2001, including Enron and WorldCom. Of all of the new regulations created as a result, the Sarbanes-Oxley Act (SOA) enacted in 2002, and in particular Section 404, has had the most significant impact on public companies. Section 404 became effective in December 2004 for accelerated filers, resulting in significant increases in SEC compliance costs over the last two years. While Section 404 hasn’t yet impacted non-accelerated filers, there are reasons to believe non-accelerated filers will also soon be faced with significant changes in SEC compliance, according to Michael R. Bodwell, partner in the Assurance & Advisory Services Practice of Whitley Penn LLP, CPAs and Professional Consultants.

“There’s a lot of uncertainty in future SEC compliance for middle market public companies,” he says. “While a lot of non-accelerated filers are nervous about what the future will bring in terms of SEC regulation, there is reason to believe regulators will come out with more pragmatic, realistic approaches to compliance for those companies.”

Smart Business spoke with Bodwell about the impacts the SOA has had on middle market public companies and what regulation changes businesses can expect to see in the future.

How have you seen the Sarbanes-Oxley Act and other reforms impact middle market public companies?
The non-accelerated filers have really struggled with how to implement Section 404 of the SOA from a time and cost standpoint. Non-accelerated filers, which still have yet to implement section 404 of SOA, are apprehensive about how they’ll be able to get it done, how much it will cost and when or if it will finally be effective for them.

Why has the SOA made middle market companies more apprehensive to become public?
Companies considering going public have to be concerned with the dramatic increase in the cost of being SEC compliant. Those costs are leading to more apprehension to enter the public markets and we’re seeing a much higher threshold in terms of the size companies feel they need to be before going public. We’re seeing a lot more companies who would rather be acquired or obtain money through some sort of private equity capital raise versus becoming a public company, because of the cost and the amount of time it takes to comply with SEC regulations.

What recommendations would you have for selecting a public accounting firm for middle market public companies?
Businesses are getting away from selecting a firm simply based on its name and size. They are wisely focusing on who will be the actual team performing the audit and who the partner and manager will be, because those are the individuals that are critical to a quality audit.

In particular, businesses should consider how much SEC audit experience the proposed audit team has and identify comparable clients of such firm in terms of size and industry. They should also consider the depth of the firm – if the lead partner or manager left the firm, is there enough depth in the firm to adequately provide audit services for the company’s needs? Companies should also focus on whom the concurring partner will be to ensure they fit properly into the equation. Companies should focus on the entire team, from partner through staff that will work on the engagement as they all have critical roles.

How have options changed in selecting public accounting firms for international companies?
Right now we’re seeing a significant number of second- or third-tier public accounting firms that have international alliances, as these alliances give them similar strength to the large international firms in performing an audit worldwide. For instance, Whitley Penn LLP is a member of Nexia International, which has representation in approximately 100 countries. We’re seeing a lot more firms doing the audit work of international companies by using those affiliations and alliances, which is providing choices companies’ desire.

What regulation changes are on the horizon for middle market public companies and how will businesses be affected?
Section 404 of the SOA is still in play for non-accelerated companies. Right now there’s a big push to not require those companies to be compliant with section 404; however, the other side of the table is arguing that if these companies are going to be public, they need to comply with all of the same rules and regulations as the big companies.

After the events in 2001, the pendulum swung far toward setting very strict regulations on public companies. We’re starting to see some backlash and pullback and the regulators will probably come out with more pragmatic, realistic approaches regarding regulations for those companies. Middle market companies are key to the future of the U.S. economy, and regulators have to afford them reasonable possibilities to access public markets.

MICHAEL R. BODWELL is a partner in the Assurance & Advisory Services Practice of Whitley Penn LLP, CPAs and Professional Consultants. Reach him at 972.392.6622 or [email protected]

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