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Sarbanes-Oxley relief for small companies

GOVERNMENT’S EXTENSION OF AUDIT DEADLINE, COST STUDY COULD SAVE COMPANIES MONEY

NORTH BAY – Small public companies are receiving more relief from part of the costly federal accounting law known as Sarbanes-Oxley.

Last month the Securities and Exchange Commission announced that it would grant small firms – those with less than $75 million in market capitalization – a one-year postponement for complying with a key auditing provision. The SEC also said it would study the cost of implementing the act for small businesses, with the potential of easing requirements in the future.

Sarbanes-Oxley was passed in 2002 in response to auditing scandals at the former Enron Corp. and other companies. It includes stringent requirements related to companies’ financial reporting, including detailed internal procedures, documentations and audits.

The new postponement applies to one of the act’s key provisions, known as Section 404, which requires company management to certify a system of internal controls over financial reporting, and then have an outside auditor evaluate those controls. It is the outside audit that is being delayed for small companies, which won’t have to comply with the requirement until 2009.

With $602 million in assets, Tamalpais Bancorp (Nasdaq: TAMB), parent of San Rafael-based Tamalpais Bank, is among the public companies in the North Bay effected by the postponement. The company’s CFO, Michael Moulton, estimates the delay will save Tamalpais about $75,000 in audit fees, nearly 2 percent of its net income for 2007.

Less certain is the potential impact of a study, announced recently by the SEC, which will study the costs and benefits of Sarbanes-Oxley to small businesses. The commission plans to conduct interviews and an Internet-based survey of companies, a move Mr. Moulton and others believe could result in a relaxing of some of the act’s requirements.

“What I’m hoping for is guidance to focus on specific areas of risk,” Mr. Moulton said.

The SEC has already made some moves to make the act more flexible. Last year it issued new guidelines instructing companies to focus more on higher-risk aspects of their business. But Mr. Moulton said the reforms could go farther to spell out particular risk areas for different industries, noting that banks are already heavily regulated.

“Our risks are substantially different than the risk of a high-tech company or a manufacturing company,” he said.

Mr. Moulton and executives at several other firms say the SEC’s new guidelines have already helped to lower compliance costs.

Terry Nelson, CFO of the Novato mutual fund company Hennessey Advisors Inc. (OTC: HNNA), said when Sarbanes-Oxley was first implemented the firm purchased expensive software and a new server and hired a full-time compliance officer.

“We really put in a robust system that cost us quite a bit of money and we’ve since ratcheted that down a little bit,” Ms. Nelson said.

Still, Hennessy’s CEO, Neil Hennessy, estimated the act will cost the company $500,000 – more than 12 percent of its 2007 net income – to implement this year.

According to Ms. Nelson, not all of that money has gone to waste.

“We’ve always been very diligent about even small minutia. ... But [Sarbanes-Oxley] has made us even more cautious,” Ms. Nelson said. “We really think Section 404 is strong for the industry.”

Now Ms. Nelson and other executives are hoping the SEC will fine-tune the act, and make good on its statement that it will use its study to look at “where companies and investors derive the benefits from Section 404.”