April 6, 2006
The WSJ reports that the SEC is not likely to exempt small companies from Section 404, as was proposed by an advisory committee six months ago. The likely outcome is a rule that lightens the 404 burden for smaller companies. Meanwhile the main beneficiaries of Section 404 -- the auditing firms-- are mounting an effective campaign to keep the rule in place. They cite data showing that costs for 404 compliance come down 16% after the first year. Great, the firms already enjoy a 80% or so (and this is a very conservative calculation) total compliance cost increase from when firms began to prepare for the effective date of the rules, in 2003. Large firms do not care much as long as all competitors pay the same charge and may even come to support the Section as long as smaller firms have a higher audit cost per dollar of revenue (due to dis-economies of small scale) -- the Section creates barriers to entry. The SEC benefits too of course, as firms must turn to the agency and its partner PCAOP for minute details of instruction on internal compliance procedures.
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