Securities regulators yesterday gave more than 2,000 public companies a brief reprieve from new rules requiring them to assess the strength of their financial safeguards, one of the most costly and time-consuming corporate reforms of the past several years.
The Securities and Exchange Commission yesterday granted companies with market value between $75 million and $700 million an additional 45 days to file reports on their internal controls, which cover such things as employee expense reports and billing practices.
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The reviews, imposed by the 2002 Sarbanes-Oxley Act, are designed to help companies root out fraud and financial mistakes that have the potential to hurt investors. Large companies had been required to file the reports on rolling deadlines that began Nov. 15. Now some of those firms will be granted a delay. Smaller firms and foreign companies trading on U.S. exchanges must begin complying in July.
SEC Chief Accountant Donald T. Nicolaisen said the agency acted after hearing numerous reports that companies and their auditors were struggling to finish the reviews on time.
Representatives of small firms had lobbied hard for a delay. "I've never seen any other issue that has put small and medium-size companies' hair on fire like this," said John P. Palafoutas, senior vice president of domestic policy of AeA, a trade association for technology firms.
Nicolaisen said that some companies still may miss the deadlines but that the overall number of late reports would be "greatly reduced" because of the extension. "We're doing this because we're anxious to get as much information out to the investor community as possible," he said.
At a brief meeting yesterday in Washington, the Public Company Accounting Oversight Board, which supervises auditors, unanimously approved companion rules to put the delay into effect.
"In the midst of a fundamental change to a new system, as we are today, the important thing is to make sure that the change goes smoothly, not whether the change occurs on the original deadline," board Chairman William J. McDonough said.
Donna J. Fisher, director of tax and accounting at the American Bankers Association, which sought a delay, said regulators "have found a nice balance between sticking to their rules and being reasonable with the requirements."
But some corporate executives say a 45-day breather is not enough. Captaris Inc., a 420-employee software company in Bellevue, Wash., has spent more than $1 million in payments to lawyers, auditors and consultants to enact the new internal control rules.
Chief executive David P. Anastasi said the company has postponed for as much as six months updates to its customer management software and to its sales commission system because the control process is taking up so much time and so many resources.
"I'm not sure that's what the intent of the law was," he said. "Small and medium-size companies are really disadvantaged."
Over the next several months, Anastasi said, he and other members of the AeA will reach out to lawmakers and SEC officials to try to persuade them to study the costs and impact of the internal control rules.
Ralph Marimon, chief financial officer at Scientific Technologies Inc. in Fremont, Calif., said that small companies are overburdened by the control rules and that regulators and lawmakers should consider cutting back on the list of things that small companies must examine. Marimon said his firm, which reports annual revenue of about $55 million, probably would spend about $500,000 complying with the law in the next year.
"For small companies, I would really like to see some relief on this burden of having to document everything," he said.
Accounting experts say that scrutiny of controls can help turn up other problems at companies. Last month, CKE Restaurants Inc., which owns Hardee's and Carl's Jr., announced it would restate its financial statements from 2001 to 2004 in part because of accounting errors that turned up in its internal control reviews, according to a research report issued yesterday by Glass, Lewis & Co.
Also yesterday, Deloitte & Touche, one of the nation's four biggest auditors, reported revenue of $16.4 billion for its fiscal 2004, an increase of nearly 9 percent over last year. The revenue growth is due in part to business the audit firm picked up from Sarbanes-Oxley Act compliance, a spokesman said.