Five Years After SOX

Five years after President George W. Bush signed the Sarbanes-Oxley Act into law, publicly traded companies across the nation are still adjusting to the new costs associated with compliance, the implementation and testing of internal controls and mandatory external audits.
No one is feeling the pinch like the little guys, according to accounting executives at locally based small and micro-cap companies.
“We try to stay ahead of the curve the best we can, but when you’re a small company, SOX compliance in general is pretty onerous,” said Karen Gallagher, senior vice president of accounting and principal financial officer at Syntroleum Corp. (NASDAQ: SYNM), 4322 S. 49th West Ave.
“It is more costly for the small companies, because some of the same requirements apply regardless of your size,” said Kathy Sheffield, treasurer and CFO of AAON Inc. (NASDAQ: AAON), 2425 S. Yukon Ave. “The little companies are doing some of the same things the big companies are, and the same risk just isn’t there.”
“It has been an interesting road. I expected it to be in-depth and a lot of work, but it was kind of overwhelming to the level that they wrote the law.”

Costs Unimaginable
The cost of SOX compliance at AAON “has been quite, quite, quite expensive,” Sheffield said. The company spent more than $1 million during just one year of SOX compliance, which takes quite a bite out of a revenue line that has exceeded $185 million in recent years.
During 2004, U.S. companies with revenues exceeding $5 billion spent 0.06 percent of revenues on SOX compliance, while companies with less than $100 million in revenues spent 2.55 percent, according to an SEC report.
The SEC and PCAOB responded to outcries from small businesses that SOX put too heavy a burden on small- and micro-cap-companies when it extended the deadline for compliance with Section 404 – the portion of SOX that mandates the implementation and testing of internal controls by an external auditor – from July to December 2007. As a result, non-accelerated, smaller companies won’t file external auditor attestations in 10Ks until 2009.
“This schedule gives smaller companies the benefit of doing an initial internal assessment of their controls without the added burden and cost arising from an external audit,” said Christopher Cox, chairman of the SEC June 5, before the Committee on Small Business in the U.S. House of Representatives. “We fully expect that, by the end of 2008, management’s familiarity with the 404 process, and its documentation of internal controls, will make it easier and less expensive to do an external audit than it would have been under the previous system.”

No Discounts
Accelerated filers are already feeling the burn of Section 404 compliance. Syntroleum Corp. will file its first management attestation of internal controls in its 2007 annual report.
“We have to go above and beyond because we don’t have as many bodies to spread the work across,” Gallagher said.
The accounting department at Syntroleum consists of Gallagher, a controller and two positions in accounts payable and payroll. Not surprisingly, the external costs of compliance at Syntroleum have exceeded payroll. Last year, Syntroleum spent about $450,000 on compliance, external auditing and SOX review, as well as overtime pay.
“The compliance costs you can only control so much,” Gallagher said. “They [external auditors] have to do X-amount of work, regardless of your size.”
To help defray the new costs, many compliance tasks have been integrated as much as possible into daily processes.
“You really have to be focused to get to the deadlines and to get through all the compliance – it’s really something that you just have to focus in on and make a concerted effort to go down that road and say, ‘We’re going to get it done,’ and not push everything to the last minute,” Gallagher said. “As projects come up in your daily work life, and you don’t get things started ahead of time, then the deadlines creep up on you and you’re not ready.”
One company looks to turn the tables and charge its auditing firm for more accountability to help cut down on compliance costs.
“We try to evaluate our controls, and we try to determine if any are overlapping,” Sheffield said of AAON. “And, we’ve looked at how we can be more risk-efficient, and we’ve also pressed the auditors on how they can be more efficient.”
How SOX costs have affected smaller companies “depends on how proactive the company is,” said Dan O’Keefe, chief accounting officer at Addvantage Technologies Group Inc. (NASDAQ: AEY), 1605 S. Iola St. in Broken Arrow.
“We at Addvantage Technologies have not been real proactive because we haven’t had to be,” O’Keefe said. “We are taking the steps to be compliant, but it’s not something we’ve accomplished or spent a lot of money on to date.”
Another reason O’Keefe is cooling his heels: SOX compliance requirements for small companies are in flux.
“A lot of what we’ve done is procrastinated, and purposefully, against spending dollars wastefully,” he said. “We’re not doing anything until it’s applicable to us and we’re required to, and when we know what the guidelines will be when they are applicable to us.”
“The last thing we want to do is to go out and spend a whole lot of money, wake up one day and have the PCAOB say, “We’ve decided this isn’t applicable to you guys.’”

Discussing the Options
Going private has been an option tossed around several local boardrooms. At Syntroleum, “it’s been discussed several times,” Gallagher said.
“We’re not going down that path at the moment, but it’s always something that’s on your mind,” Gallagher said. “If we were private, we would save a lot of money.”
Going private is not far from the minds of Addvantage Technologies board members, either.
“Do we want to be a public company in today’s environment? We still talk about it,” O’Keefe said.
The dynamics of today’s business world have changed drastically since the late ‘90s, O’Keefe said.
“There’s a shift in the thought process between when everybody wanted to be public because it was the Who’s Who – it got you the PR, and it got you all the toasts at the cocktail parties. In 2007, every CFO says, ‘Man, I’m sorry you’re going public.’ Nobody wants to be public today. It’s no fun signing those certifications; it’s no fun putting yourself and your family at personal liability risk. There is no more fun – the party wore off, this hangover exists and you’re not enjoying it as much because there is so much more scrutiny.”
Though AAON has never taken action to leave the NASDAQ, “there has been a lot of desire here to see it happen – daydreaming of the days when you spent your time making the business better,” Sheffield said.
As small companies teeter on the edge of the decision to go private, changing requirements continue to resemble a costly game of Simon Says for small companies.
“The people getting in now as opposed to 2004 do have an advantage,” Sheffield said. “They have the benefit of the three years’ experience that has been incurred on everybody’s side – the SEC, the auditing firms and the companies themselves.”

Case In Point
Webco Industries Inc., a manufacturer and supplier of specialty tubing and pressure tubing products at 9101 W. 21st St. in Sand Springs, left the AMEX in Jan. 2005. Besides that the stock of the company was thinly traded, a primary reason for deciding to go private was “the aggregate cost of being public for a company of our size, with our earning structure, and our industry was too high,” said Mike Howard, Webco CFO.
Webco officials estimated the costs of remaining public after SOX to be $1.7 million, which represented 25 percent of income at the company at the time. Webco stock is now traded on the Pink Sheets (WEBC).
“We found that the Pink Sheets environment allowed us as much liquidity as we were experiencing on the AMEX. It was a good move for us,” Howard said.
The rigors of meeting compliance requirements promised to stifle opportunities for a company the size of Webco, Howard said.
“We don’t want to suffer losing manufacturing opportunities for external auditors,” he said. “We’ve certainly benefited by being able to focus on our core business. I need to be thinking about how to implement and finance new investments for this company and keeping our capital as implemented as well as possible. I don’t need to be worried about Section 404.”
As compliance costs don’t seem to be decreasing any time soon, CFOs hope time and experience will help companies, regulatory bodies and investors strike a common deal.
“I don’t think they knew the ramifications of everything that they were doing, and they certainly underestimated what it was going to cost companies,” Sheffield said of lawmakers. “We need to get some reality put to it so there aren’t any more companies that go out of business, go private, or move their stock to a foreign exchange just so they don’t have to go through all of this to comply.” ?

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