Changes sought in fraud law

Investment groups criticize section of Sarbanes-Oxley Act

December 10, 2005|By TRICIA BISHOP | TRICIA BISHOP,SUN REPORTER

Organizations representing hundreds of venture capital, health care and technology companies are calling for changes to the Sarbanes-Oxley Act of 2002, which they contend is stifling business investment and innovation.

A letter that industry groups mailed to the Securities and Exchange Commission on Thursday criticized the provision of the act that requires companies to take certain steps to verify their accounting procedures and reports as "one-size-fits-all."

The act puts "disproportionate cost burdens" on smaller public companies, according to the letter. It was signed by the Biotechnology Industry Council, the National Venture Capital Association, the Advanced Medical Technology Association, a coalition of technology chief executives called TechNet, the California Healthcare Institute and the North American division of the Semiconductor Equipment and Materials International Industry Association.

SEC figures show that small companies make up about 80 percent of the country's public businesses but 6 percent of total market capitalization.

Estimates put the cost of compliance with certain requirements, such as hiring outside auditors to assure accounting claims, at about $4 million for big businesses and $1 million for small businesses. That is a major hurdle, some said, in fields such as biotech where many companies have little or no revenue for years while they experiment with new drugs. An Ernst & Young LLP report this year said net loss for biotech companies grew by $1 billion in 2004, with about a third of that attributable to costs associated with Sarbanes-Oxley provision.

The act, crafted by Sen. Paul S. Sarbanes, a Maryland Democrat, and Rep. Michael G. Oxley, an Ohio Republican, became law in response to major accounting frauds that collectively cost investors billions of stock value in 2001 and 2002.

"We support Sarbanes-Oxley. ... We just want to be realistic about what is fair in terms of compliance costs for smaller companies," said James C. Greenwood, head of the Biotechnology Industry Organization.

He is a former Republican congressman from Pennsylvania who chaired the subcommittee that led the inquiries into fraud at Enron Corp., Global Crossing and WorldCom Inc.

His group joins a growing chorus of concern from various organizations, including the U.S. Chamber of Commerce and American Bankers Association, over the law's Section 404, which was adopted in 2003.

"This provision, in addition to being financially burdensome, requires companies to expend substantial time and effort away from important strategic and operational matters," David Chavern, director of the chamber's corporate governance initiative, wrote to the SEC in August.

"We believe that this weighs particularly heavily on small companies that are attempting to grow and expand rapidly," Chavern said.

Even large accounting firms, which could benefit from additional fees, have acknowledged the difficulty.

"We would not object to making compliance with [Sarbanes-Oxley] Section 404 optional for certain small companies that have a market capitalization below a predetermined level," PricewaterhouseCoopers LLC wrote to the SEC in September.

In response, the SEC has twice delayed the deadline for 404 compliance by small companies and set up an advisory committee to evaluate the situation.

This week, part of that committee made several recommendations that could address some of the criticism, such as exempting companies with market capitalizations and annual revenue below $125 million from 404 requirements. That would affect about half of the country's public companies.

Those recommendations will go before the larger committee Wednesday. The panel must recommend changes to the full commission by April.

Mark G. Heesen, president of the National Venture Capital Association in Virginia, called the subcommittee's recommendations a "step in the right direction," but his trade group would like to see the exemption expanded to companies with market capitalizations below $700 million or revenue under $250 million. That would cover about 80 percent of U.S. public companies.

tricia.bishop@baltsun.com

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