The Land of the Audit-Free

After five years and numerous studies confirming the onerous costs of Sarbanes-Oxley compliance for smaller companies, some relief is finally in sight. New guidelines approved in May by the SEC and the Public Company Accounting Oversight Board will make it less costly for companies to meet the regulatory demands required by SOX.

SOX mandates that corporate managers assess whether they have sufficient financial safeguards in place to prevent fraud. Under the old guidelines, an outside auditor then had to assess those processes. Now, accountants still have to give an opinion on the effectiveness of the safeguards but not reassess them. "Smaller firms, [which] may not have formal processes in place, have been struggling with the requirement," explains Christian Leuz, a professor at the University of Chicago's Graduate School of Business. "The SEC and the PCAOB are trying to address the fact that the burden of compliance costs has disproportionately affected smaller firms." Other changes endorsed by the SEC include:

• Tailoring company audits to consider "particular circumstances"
  
• Encouraging auditors to use their own judgment in the process, a flexibility the SEC has never officially allowed before
  
• Avoiding costly duplication of work by allowing flexibility for auditors to determine when they can rely on work previously done by others

The changes come at a critical time for companies with less than $75 million in market capitalization, which are to begin complying with the management guidance part of SOX during the 2007 audit cycle.

Jennifer Pelletis a freelance writer specializing in business and finance.