AeA Calls for Reform of Sarbanes-Oxley Section 404 Regulations
Section 404 unnecessarily penalizes small and medium-sized companies

Washington, D.C. – AeA, the Nation’s largest high-tech trade association, today released its report titled Sarbanes-Oxley Section 404: The ‘Section’ of Unintended Consequences and its Impact on Small Business.  The report was formulated by AeA member company CFOs and senior executives from its 18 councils throughout the United States.  While it is highly complementary of Sarbanes-Oxley and its effectiveness on corporate governance, the report is critical of Section 404, which requires extensive new internal controls for financial reporting.  AeA states that section 404 is having a devastating impact on small- and medium-sized companies and many of the objectives of the legislation’s authors will not be realized.

Sarbanes-Oxley Section 404: The ‘Section’ of Unintended Consequences and its Impact on Small Business presents the major problems with Section 404 and makes recommendations to the Securities and Exchange Commission (SEC), the Public Company Accounting Oversight Board (PCAOB), and Congress to take action and improve implementation.  The report is not asking for legislative changes. Rather, it recommends modifications to the guidance that has been provided, the regulations implementing Section 404, and the interpretation of same by the auditing firms.

In referring to Section 404, William T. Archey, President and CEO of AeA said, “This is the quintessential example of the law of unintended consequences, and Section 404 of Sarbanes-Oxley is not meeting its objectives. It has been an unnecessary burden for small- and medium-sized companies throughout the United States, and while section 404 is well intentioned, the tremendous increase in cost to smaller companies is out of control.  At the same time, many of the requirements being imposed will not help prevent corporate fraud.  Our mission is simple: We are trying to improve implementation of Section 404 through the regulatory process; not roll back Sarbanes-Oxley.  There was unanimous agreement among AeA’s Committee that Sarbanes-Oxley, with the exception of Section 404, is improving corporate governance in a cost effective way.”

“When Congress passed the Sarbanes-Oxley Act, the SEC estimated the cost of implementing these regulations would be less that $1.5 billion, said Alex Davern, Chairman of AeA’s Sarbanes-Oxley Advisory Committee and Chief Financial Officer of National Instruments Corporation (NASDAQ:NATI).  “The true cost will be close to $35 billion for the first year.  Smaller companies neither require, nor can they afford, the same level of investment in internal controls as larger companies.  Implementation of Section 404 needs to be reevaluated and modified to prevent permanent damage to the small- and medium-sized businesses that are the job growth engine of the U.S. economy.  Without change, the objectives of Section 404, to impose effective internal controls to help prevent fraud, will not be realized.  The SEC and the PCAOB must act now, and Congress needs to exert its oversight authority by holding hearings on this issue immediately."

A copy of the report can be found at http://www.aeanet.org/soxreport.

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AeA, founded in 1943, is a nationwide trade association that represents all segments of the technology industry and is dedicated solely to helping our members’ top line and bottom line. We do this in partnership with our small, medium, and large member companies by lobbying governments at the state, federal, and international levels, providing access to capital and business opportunities, and offering select business services and networking programs.  For more information, please visit http://www.aeanet.org.

This page was last updated on 02/10/05.