Business hails looser SOX rules, but wants changes

Auditing requirements 'can be a huge cost for a small company'

‘‘The idea is to have more than one person involved in bookkeeping so it’s harder for one person to engage in embezzlement,” said Burlage, an active member of the Maryland chapter of the National Federation of Independent Business. Last year, she was named Maryland’s Small Business Champion. ‘‘It can be a huge cost for a small company even if you just hire one extra person.”

The law, introduced by then-U.S. Sen. Paul S. Sarbanes of Baltimore and then-Rep. Michael Oxley (R-Ohio), was approved in 2002 in the wake of corporate scandals involving accounting procedures.

The recent changes approved by the U.S. Securities and Exchange Commission allow companies some leeway in reporting on the biggest risks to their accounting systems. Companies still must employ outside auditors, but the idea is to reduce redundancies between what managers and auditors do, officials said.

Numerous Maryland companies have cited the costs racked up in certifying their accounting systems in recent financial reports. Among those was Medifast, an Owings Mills weight-loss company that this week signed soap opera actress Genie Francis as a national spokeswoman.

Officials there blamed the law for raising expenses that cut its 2006 fourth-quarter earnings by 2 cents per share. Still, Medifast showed net income of $5.1 million last year, about double that of 2005.

Some officials at larger Maryland companies have heralded the law recently. Jim Brady, chairman of Baltimore energy giant Constellation Energy Group’s audit committee, said during the company’s annual shareholders’ meeting in mid-May that the act ‘‘caused our internal control environment to be pretty much state of the art.”

Independent auditors now report directly to companies’ audit committees, rather than directors and CEOs, Brady said during the meeting, according to a webcast.

‘‘We have an opportunity to discuss without any management being present issues that they have observed and input that they might offer that helps us carry out our responsibilities very, very effectively,” he said.

While most large companies have certified their accounting controls, most smaller public companies with a market value — the stock’s price per share times the number of outstanding shares — of less than $75 million have until March 2008 to file reports on internal controls. Outside audits of the controls are due by March 2009.

Officials with the U.S. Small Business Administration’s Office of Advocacy have asked the SEC to give smaller companies more time, even though the deadline has been previously extended. That would be a big help, Burlage said.

‘‘Many companies that aren’t public are concerned that the federal law will trickle down through state law,” Burlage said. ‘‘There have been bills introduced in the legislature to implement part of the Sarbanes-Oxley Act on the state level. But those haven’t passed, yet.”

Compliance costs decline

A recent survey by Financial Executives International, a Florham Park, N.J., association, found that the average cost to comply for larger companies — those with market values greater than $75 million — declined by 23 percent to $2.9 million for 2006 from 2005.

The drop was largely attributed to increased efficiencies and improved technical systems and software, association president and CEO Michael P. Cangemi said in a statement. ‘‘While there is still work to be done, we have come a long way,” he said.

Still, the average large company required 18,070 employee hours internally to comply in 2006, down 10 percent from 2005.

Businesses with centralized operations had significantly lower total costs than did those with decentralized operations — an average of $1.7 million for the former compared with $4 million.

Some 78 percent of respondents said the costs still exceeded the benefits, down from 85 percent in last year’s survey. More than half agreed that compliance increased investors’ confidence in financial reports.