Community bankers are keeping their fingers crossed that the Securities and Exchange Commission will give them an extra year to comply with the internal-controls provision of the Sarbanes-Oxley Act.
In August adan advisory committee to the Securities and Exchange Commission recommended that small, publicly traded companies be given until July 2007 to meet the requirements of section 404 of the Sarbanes-Oxley Act.
The SEC has yet to act on the recommendation, but bankers would welcome any delay. They say that section 404 would significantly increase compliance costs and they hope to use the extra time to press their case that small companies — especially community banks and thrifts — should be exempt from the provision.
“The cost isn’t worth the candle,” said David Bochnowski, the chairman and chief executive of the $592 million-asset NorthWest Indiana Bancorp in Munster. “We have to take a realistic look at how this should apply to small companies. We want to continue to report publicly, but we shouldn’t have to penalize shareholders to do so.”
The SEC set up the Advisory Committee on Smaller Public Companies in March to address concerns that complying with section 404 is too onerous for small companies. The committee, which has been holding public hearings across the country, made its recommendation to extend the deadline on Aug. 10, a day after it held a hearing in Chicago. Its next scheduled meeting date is Sept. 24 in San Francisco.
As it is being implemented, section 404 requires publicly traded companies to get an outside auditor to certify the effectiveness of their internal controls every year. Small companies say this could add tens or hundreds of thousands of dollars a year in compliance costs that they cannot afford.
Indeed, compliance costs related to Sarbanes-Oxley have become such a burden to many small companies that hundreds — including dozens of small banks — have gone private since the law was passed three years ago.
Mr. Bochnowski says that complying with section 404 would cost NorthWest an additional $200,000 a year.
NorthWest announced in May that it was giving serious consideration to going private, but last week Mr. Bochnowski said he put those discussions on hold in the wake of the advisory committee’s recommendation to extend the deadline.
Large publicly traded companies, those with public floats in excess of $75 million in value, are already subject to section 404, but the SEC has extended the compliance deadline for smaller companies twice. Originally the regulation was supposed to take effect in their first full fiscal year after July 15, 2004.
John Heine, a spokesman for the SEC, said Tuesday that the agency was weighing the advisory committee’s recommendations but had set no timetable for reaching a decision.
W. Page Ogden, the president and CEO of the $398 million-asset Britton & Koontz Capital Corp. in Natchez, Miss., said businesses and regulators need the extra time to develop a “workable situation” before small businesses are required to comply with section 404.
What virtually all community bankers would prefer is that the SEC exempt small businesses — or at least small banks and thrifts — altogether.
“At a minimum, we believe the SEC should … exempt community banks and savings associations with less than $1 billion of assets,” Mr. Bochnowski said at the Chicago hearing.
Bankers’ dissatisfaction with section 404 does not stem from the language of the Sarbanes-Oxley Act itself. What they take issue with is a decision by the Public Company Accounting Oversight Board, which regulates accountants and auditors. It has ruled that auditors reviewing internal-controls reports must provide an audit opinion on them; an opinion is the most stringent, labor-intensive, and expensive standard to which auditors can be held.
Bankers say the audit opinions would do little or nothing to help investors, since their internal controls already get tested regularly as part of their examinations. Mr. Ogden said the accounting oversight board’s position “elevates form over substance.”
“There needs to be some kind of recognition of the role that our direct banking regulators play,” he said.
In addition to recommending a delay in implementing section 404, the advisory committee also recommended changing the definition of small companies. Instead of a standard defined by the value of the public float — the shares that are in investors’ hands — the commission recommended that companies with overall market capitalizations below $700 million be classified as small businesses. About 80% of all publicly traded companies would qualify as small under that standard.
