Sarbanes-Oxley: Section 404 and the Death of the Small Public Company
With the approaching implementation of § 404 of the Sarbanes-Oxley Act, there is widespread criticism of the enormous costs of complying with the section. Although § 404 arguably improves investor confidence by making the financial condition of a company more transparent, businesses argue that the costs are simply too high. The question remains as to whether high costs are a good enough reason to expose investors to the type of fraud Sarbanes-Oxley protects, or whether there are public policy reasons to ease the burdens.
This note examines the effects of § 404 on small businesses, and argues that public policy not only permits the SEC to ease the burden for small firms, but demands it. The high compliance costs implicate public policy by effectively pricing small businesses out of the public capital markets. Recent discoveries about the importance of small business to the economy reveal that this has the serious potential to send industry and the economy as a whole into ruin.
Moreover, the effects of § 404 on investor confidence are uncertain at best, with reason to believe that the financial transparency it creates does as much harm to investors as it does good. This is especially true for small businesses, which do not have as much of an impact on investor confidence as the Enrons and Worldcoms. As a result, it is imperative that the SEC remove some or all of § 404’s burdens on small businesses.
Date of this Version
M Gregory Cutler, "Sarbanes-Oxley: Section 404 and the Death of the Small Public Company" (April 11, 2006). bepress Legal Series. bepress Legal Series.Working Paper 1254.