Take It Slow: A Novel Concept in the Life ofSarbanes-Oxley

Table of ContentsI. Introduction 1186II. The Background of the Sarbanes-Oxley Act 1187A. The Stock Market Bubbles and Bursts 1187B. The Birth of the Sarbanes-Oxley Act 1191C. The Sarbanes-Oxley Act 11941. The Act at a Glance 11942. Section 404 1196III. The Aftermath of section 404 1197A. Unexpected Costs 1198B. The sec Responds to the Small Business Community 1199IV. The Small Business Question: To Comply or Not to Comply? 1200A. The Small Business Argument 12011. Voluntary Compliance 12032. Exemptions from Compliance 12063. Tailor the Requirements of section 404 1209B. Saving Small Businesses from Themselves 12101. Rapidly Declining Costs of Compliance 12112. Regulation Will Not Destroy the Benefits of Being Public 2143. Strong Internal Controls Achieve Their Purposes 1215V. Conclusion 1216I. IntroductionIn the late 1990s American equity markets surged to new heights. Investors, enjoying an unprecedented period of economic growth, flooded the markets with capital. However, this dream would quickly turn into a nightmare. In a matter of months many individual investors found their portfolios and retirement accounts decimated as the market collapsed. Dismayed investors lost trillions of dollars of net worth, seemingly overnight.This dismay turned quickly to anger as the deceptions of company executives and their advisors proved to be the root of the market collapse. An overwhelming public outcry for reform, or vengeance, arose from the ashes of these scandals. Congress reacted swiftly, instituting sweeping corporate reforms, drastically changing the corporate regulatory environment with the passage of the Sarbanes-Oxley Act of 2002.1Critics quickly denounced the Sarbanes-Oxley Act as "a nightmare for company executives," truly "a telling example of the law of unintended consequences."2 Immediately commentators recommended repealing or modifying the Sarbanes-Oxley Act. Critics have since focused their attacks upon section 404 of the Sarbanes-Oxley Act (section 404), the section which requires reports on a company's internal controls by management and their external auditors.3 However, these critics still call for relief from this misunderstood and much maligned reform.This Note argues that while Congress passed the Sarbanes-Oxley Act without the proper study and contemplation typically given to such sweeping legislation, current efforts to exempt smaller companies from section 404 are similarly misguided. Instead, this Note proposes a staggered implementation process for smaller companies that have yet to comply with section 404. In addition, this proposal provides temporary relief from the onerous requirement of auditing internal controls to smaller companies already in compliance with section 404. The "take it slow" approach of this proposal would ease the burdens of compliance for companies, while providing the necessary protection to investors. This slower approach would also allow regulators and companies to understand both the drawbacks and benefits of the Sarbanes-Oxley Act better. Only when these parties fully understand all of the ramifications of the Sarbanes-Oxley Act can constructive dialogue about reform and relief begin.Part II of this Note examines the factors in the equity markets that led to the broad public support for regulatory action and briefly looks at the SarbanesOxley Act. Part III highlights the unexpected negative effects arising from implementing the Sarbanes-Oxley Act and briefly describes the actions the securities and Exchange Commission (sec) took to address the small business community's concerns about these negative effects. …