Take off the SOX

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Corporate America largely regards the 2002 Sarbanes-Oxley accounting law as a settled matter. So, it's telling that the pressure keeps mounting to relieve smaller public companies of the evident burdens the law places upon them.

"I never intended to have these guys comply with what General Motors complies with," former Pennsylvania lawmaker and current head of the Biotechnology Industry Organization Jim Greenwood told us at an editorial board meeting this month as he motioned to two local biotech executives who accompanied him. Both men said the law's one-size-fits-all reporting requirements (the dreaded Section 404) unduly burden companies like their own. As a proportion of revenues, compliance costs smaller firms several times what it costs larger ones -- among whom the real targets lurked, not among the mom and pops.

One of them, Gary Lessing, chief financial officer of cancer-drug developer Avalon Pharmaceuticals of Germantown, reports that nearly 2 percent of his company's $30 million in expenditures last year were related to Sarbanes-Oxley. The company, founded in 1999, has no sales as it awaits its oncological discoveries. That's typical in biotech, where products take years to reach the market. "Every dollar comes out of spending for novel therapeutics on cancer," he said.

Another executive, James Burns, president of Rockville-based EntreMed Inc., estimates that he personally spent about a month-and-a-half's worth of man-hours in 2004 making sure his company was compliant. That can be a serious drain on an executive's energy. It causes some companies to go private -- like the Vermont Teddy Bear Co., which did so citing Section 404 last year -- or sell out to larger competitors.

Just as worrisome is the impact the law has on startups that haven't come into existence yet. To judge by Securities and Exchange Commission data, many smaller companies are now choosing to stay private. That's at odds with the broad shareholder democracy the SEC could ideally promote.

The SEC is well aware of the small-business problem; Chairman Christopher Cox has signaled concern on multiple occasions. But in April, when the SEC advisory committee on small business recommended exempting so-called small-cap companies with revenues under $250 million from the strict rules, the commission apparently declined. Instead, it asked for another public-comment period before it issues a rule. We still hold out hope that Mr. Cox will take the committee's advice.

Failing that, of course, it falls to Congress to change Sarbanes-Oxley. If the SEC cannot help small companies, Congress should exempt these smaller companies from Section 404's stricter rules, or at least relax those rules. The coming retirement of both Messrs. Sarbanes and Oxley should open the door.