The problem with Sarbanes-Oxley is that it's tailor-made for big corporations. Hardly surprising, given that it was framed in response to the collapse and fraud at giant corporations like Enron and WorldCom.
But as Duane Morris partner Aegis Frumento argues, Sarbanes-Oxley has a framework that doesn't apply to smaller companies.
In his piece SOX: One Size Doesn't Fit All, Frumento points out that smaller companies aren't just different because they have less money. At smaller companies, managers have to wear many hats and have to be more flexible, which means the internal checks and balances are very different. Also, they attract fewer investors.
What then about protecting the investors? Frumento says the protections shouldn't be the same.
"No one invests, or should invest, in a small public company as a safe bet. Just the opposite, people invest in small public companies in the hope of a large reward. It has long been known that investments in smaller companies yield, on the aggregate, higher returns than those in large companies. It is true that many investments in small public companies fare badly, but those few microcaps that break into the ranks of large companies perform spectacularly better than anyone should ever expect a large company to perform. They are the stuff of legend — names like Microsoft, Apple Computer, Intel.
"Yet high reward is just the positive face of risk, the obverse side being loss. Among investors in small public companies, every big winner stands next to many losers. Both the winners and the losers exist because they took a risk on an uncertain venture. For investors in small public companies, generally individuals and venture capitalists, the stock certificate they hold may be the equivalent of a ticket and a dream, but that dream of high reward is just what keeps capital flowing to small companies."
Meanwhile, the Chairman of the House Committee on Small Business Don Manzullo has called on the Securities and Exchange Commission to accept the recommendation of its advisory committee and exempt smaller companies from Section 404, according to a report.
Yeah right, don't hold your breath. There's the report of the SEC's acting chief accountant Scott Taub defending the implementation of Section 404 and hosing down any prospect of it being modified for smaller companies.
Which means the problem is not going to go away. Not that it's insurmountable.
As former SEC chairman Harvey Pitt has written, one solution might be to give the SEC power to determine the applicability of internal control requirements to companies of different sizes.
But that's a political problem.
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