GAO Releases Report On Sarbanes-Oxley Costs For Smaller Businesses

The Government Accountability Office (GAO) has released a report, Consideration of Key Principles Needed in Addressing Implementation for Smaller Public Companies.

According to the GAO's Highlights, the report:

1. Analyzes the impact of the Sarbanes-Oxley Act on smaller public companies, particularly in terms of compliance costs;
2. Describes responses of the Securities and Exchange Commission (SEC) and Public Company Accounting Oversight Board (PCAOB) to concerns raised by smaller public companies; and
3. Analyzes smaller public companies' access to auditing services and the extent to which the share of public companies audited by mid-sized and small accounting firms has changed since the act was passed.

The report starts with the premise that "regulators, public companies, audit firms and investors generally agree" that Sarbanes-Oxley has had "a positive and significant impact on investor protection and confidence."

Putting that aside, the GAO did find that:

costs associated with implementing the Sarbanes-Oxley Act - particularly those costs associated with the internal control provisions in section 404 - were disproportionately higher (as a percentage of revenues) for smaller public companies.

(emphasis added)

The report went on to note however, that:

While public companies - both large and small - have been required to establish and maintain internal accounting controls since the Foreign Corrupt Practices Act of 1977, most public companies and their external auditors generally had limited practical experience in implementing and using a structured framework for internal control over financial reporting as envisioned by the implementing regulations for section 404.

The GAO also found that many of these increased costs are one-time expenses incurred as companies put in place internal accounting controls.

Also of note, the report found that Sarbanes-Oxley benefited the accounting industry as more companies hired mid-size and smaller accounting firms. The effect seems somewhat muted, however, when the full picture is examined:

Overall, mid-sized and small accounting firms conducted 30 percent of the total number of public company audits in 2004 - up from 22 percent in 2002. However, the overall market for audit services remains highly concentrated, with companies audited by large firms representing 98 percent of total U.S. publicly traded company sales (revenues).

The Washington Post has a story on the report here.

ADDITION: Financial Executives International (FEI) has an analysis of the report here.