Small and medium-sized companies will soon gain additional Sarbanes-Oxley relief once the recently passed JOBS Act becomes law.
In my last blog entry, I mentioned identical bills making their way through both houses of Congress aimed at encouraging small businesses to go public. The bills relaxed audit requirements for small businesses deemed “emerging growth companies.”
Who are these emerging growth companies? The JOBS Act defines them as businesses with total revenues less than $1 billion.
A lot can happen in a month. The bills, now consolidated into the Jumpstart Our Business Startups Act, or JOBS Act, quickly passed both houses of Congress in late March. As of this writing, the president is expected to sign the act into law in early April.
So, what exactly does the bill do and what impact will it have on an organization’s Sarbanes-Oxley compliance?
There are a number of provisions in the JOBS Act that change how investors interact with small businesses, including allowing small businesses going public to make only two years of financial statements available to investors instead of three, and the legalization of internet crowd funding.
However, the provision that applies most to accounts payable is that the act exempts emerging growth companies from complying with Sarbanes-Oxley section 404(b) for five years. Section 404(b) requires public companies to have management and independent auditors sign off on the effectiveness of their internal controls.
What this means is that if your business is an emerging growth company, then for the first five years after going public you are not required to have your internal controls attested. Prior to the law, businesses already had two years’ grace before they had to comply with section 404. The JOBS Act adds three additional years.
Note that the Wall Street Reform and Consumer Protection Act of 2009 already exempted organizations with public float of less than $75 million (called accelerated filers) from section 404. The JOBS act in no way affects that exemption.
Anyone who reads my blogs regularly knows that I think SOX is something that should exist. It’s too early to tell whether relaxing these standards will lead to an increase in fraud and misstatements among small businesses. However, delaying the SOX burden will likely allow more businesses to go public and invest money back into their companies.
According to an article posted in CFO Magazine, Harvard law professor John Coates says small companies stand to save hundreds of thousands of dollars by not having to comply with SOX audit requirements for five years.
CFO quotes Coates with saying “That’s a rollback of Sarbanes-Oxley for those companies for a limited amount of time, which is probably not a terrible idea, considering they ought to be focused on growing the business post-IPO.”
Accountants are understandably shaken about the JOBS Act, as it reduces transparency as well as impacts their own bottom lines. A Wall-Street Journal blog post included the following quote from Cindy Fornelli, executive director of the Center for Audit Quality:
“We’re troubled by the notion that investors in smaller public companies don’t deserve the same financial reporting safeguards as investors of large public companies. Job creation is important, but so is investor protection.”