Critics say accounting reform has gone too far: costly new rules in Sarbanes-Oxley Act of 2002 create woes for public companies.

Public companies hope Christopher Cox's appointment to the Securities and Exchange Commission signals help is coming on the regulatory front.

The problem: The Sarbanes-Oxley Act of 2002 has created a costly new set of rules that public companies--especially smaller ones--have trouble satisfying.

"Getting in compliance with Sarbanes-Oxley is a deterrent to day-to-day business," said Jim Peterson, the chief executive of Lrvine chip maker Microsemi Corp. "In resources and dollars, and in return to shareholders, it's more of a detraction than a positive."

Reform was a response to corporate accounting scandals at Enron Corp., World-com Inc. and others.

"Its intent was good--leveling the playing field and making sure that we're held responsible for the actions we do in the corporate world," Peterson said.

Most observers say that Cox, a Republican congressman from Newport Beach, would be limited in what he can do as head of the SEC, which only enforces Sarbanes-Oxley, known as SOX.

"I don't think the SEC under Cox would even try to make changes to Sarbanes-Oxley itself because Congress passed the act with such overwhelming support," said Vivek Mande, professor of accounting and director of the center for corporate reporting and governance at Cal State Fullerton. "I think Cox will have more of a forward looking agenda. But he could give some relief by diluting some of the provisions of the act. The SEC already has given smaller businesses until next year to comply with Section 404."

Section 404 is seen as the most difficult part of SOX. It requires publicly traded companies to provide extensive details and an evaluation of its financial reporting controls and accounting procedures, such as how inventory and payroll are monitored.

This is the first year that companies reporting their annual results as of Dec. 31 must comply with Section 404.

High Cost Of Business

Some estimate that compliance with the act is costing companies at least $1 million annually, perhaps as much as $4 million.

San Clemente-based Biolase Technology Inc. and Newport Beach-based Impac Mortgage Holdings Inc. were among the hundreds of publicly traded companies that this year said they wouldn't meet a deadline to file their annual reports with the SEC. They cited Section 404 for the delay.

SafeGuard Health Enterprises Inc., an Aliso Viejo provider of dental and vision insurance, last year elected to go private, putting Wall Street in its rearview mirror.

"Sarbanes-Oxley was one of the factors behind that decision," said Ron Brendzel, vice president and general counsel with SafeGuard.

Brendzel said the legislation places too much of a burden on smaller public companies.

"When an organization has to spend $1 million to comply with all the Sarbanes-Oxley requirements, the smaller the company, the more burdensome that cost becomes," he said.

Possible Changes

Cox, who has promoted free enterprise rather than heavy-handed regulation during his career, could push for changes as head of the SEC.

"I've met (Cox) a couple of times and I think that he is a very thoughtful person and is very smart," Brendzel said. "Cox and his staff will take a very careful look at Sarbanes-Oxley and look and see whether modifications are necessary. He will come up with thoughtful and reasonable recommendations --that's been his process in the past."

One possible fix that Congress could pursue: tiering the reform.

"There is some feeling that the process could be tiered and that the amount of required disclosure and internal controls should be graduated based on the size of the company," said Tom Crane, a member of the executive committee and partner in the corporate practice of Costa Mesa law firm Rutan & Tucker LLP.

But there would be consequences under the scenario.

"Such an approach would have to come with a warning to investors that those smaller companies with a lower level of disclosure obligations carry with them a higher level of risk," Crane said. "It would reduce the compliance burden for those companies, but it could have the unintended effect of drying up capital sources for those smaller companies if people don't have faith in their system."

Santa Ana-based MSC.Software Corp. is the target of an SEC investigation into its financial reporting. The inquiry came after the company launched its own look into its accounting procedures,

"Our goal with Sarbanes-Oxley would be to have a better balance," said MSC spokesman Todd Evans. "We're happy to do whatever the SEC and Congress want us to do. We're doing it and our accountants are lock step with us But we definitely think there needs to be a better balance between what's fair to companies and what's fair to investors."

MSC plans to restate earnings results for the last three and a half years.

Is Sarbanes helping to catch fraud?

"Even certain members of the SEC staff have said that if someone is intent on committing fraud within a company, they're going to commit fraud and they're going to try to find ways around Sarbanes-Oxley," said Numan Siddiqi, a corporate and securities attorney with Newport Beach law firm Stradling, Yocca, Carlson & Rauth. "But what Sarbanes-Oxley can do is increase the chances of exposing fraud."

Jim Kolar, managing partner of the Irvine office of PricewaterhouseCoopers LLP, said investors and other observers have a better understanding of how companies come up with their financial results in the wake of SOX.

"And there now is overall a higher quality in companies' financial statements," Kolar said.

Reform was necessary, but has gone too far, said Bob Grant, former office managing partner of the Costa Mesa office of Deloitte & Touche LLP.

"Companies have had to spend too much money, especially on Section 404 compliance," Grant said. "I think there have to be some refinements."

Grant recently left Deloitte to open his own tax practice.

Chris Cziborr writes for the Orange County Business Journal.