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Experts Disagree on Burden Sarbanes-Oxley Puts on Business

Robert Grady, managing director at the Carlyle Group, told CNBC’s “Morning Call” that Sarbanes-Oxley imposes unreasonable costs on small companies that may delay their decision to go public.

“The evidence is beginning to accumulate rapidly,” Grady said Friday. “For the last six years in a row, there have been an average of 27 technology IPOs per year on Nasdaq. That compares to an average of 157 per year through the decade of the 1990s – not just in the bubble. There’s been a radical fall-off.”

He said major companies can absorb the accounting expenses imposed by Section 404 of Sarbanes-Oxley, but small companies cannot.

“We’re compromising the profitability of these tiny companies with (Section) 404 requirements,” he said. “…The (IPO) underwriters want the company to be profitable when it goes public. (Section 404 expenses) delay crossing into profitability for a year or two. It’s quite an extraordinary cost for a tiny company.”

But David Ruder, professor of law at Northwestern University and former SEC chairman, disagreed.

“I think the internal control provisions under Section 404 are absolutely crucial to the management of and honesty of our businesses,” Ruder said.

He said Sarbanes-Oxley doesn’t’ need to be amended.

“The Securities and Exchange Commission and the Public Company Accounting Oversight Board are taking steps to reduce the impact of that regulation on large and small companies,” Ruder said. “They’re in the process of approving new Auditing Standard Five which changes a lot of the ‘musts’ to ‘should’ and provides for top-down rather than bottom-up analysis.”