Corporate Reforms Irk Small Business

WASHINGTON — Martin Paravato applauds the sweeping corporate reform law that Congress passed in 2002 to protect the public from another Enron.

Mostly, that is.

"Overall, I think there are many benefits" to the Sarbanes-Oxley law, said Paravato, chief financial officer of Iris International Inc., a medical equipment manufacturer in Chatsworth. "I'm on board."

But like a growing number of executives, Paravato is no longer on board 100%. Critics, especially in small and medium-size publicly traded companies, are fuming over the costs of a provision that was included to ensure the accuracy of a company's financial reporting.

The measure, known as Section 404, is forcing companies to review, and in many cases change, a multitude of their basic, daily procedures -- including how they maintain records, secure computerized data and handle inventory. Companies are paying hundreds of thousands and even millions of dollars to auditors as they scramble to comply.

"It's not right," Paravato said. "We paid $400,000 in cash out of our own pocket, and I don't feel like we've gotten anything for it."

Under the requirement, which supporters view as a vital investor protection, companies must show in their annual reports that they have controls in place to safeguard the integrity of their financial statements.

Controls cover such nitty-gritty matters as whether a company has effectively restricted access to its computer system. The controls must be approved by independent auditors, who have been billing many added hours to meet the mandate.

Companies were given time to implement the measures, and the majority of big public companies will file their first internal control reports this spring. Most smaller ones face year-end deadlines, based on a rolling schedule set by the Securities and Exchange Commission.

Critics, however, say it makes little sense to saddle smaller companies with controls and procedures identical to those of giant enterprises that boast legions of accountants. Some also question auditors' demands for information that may seem far afield from financial reporting.

"We have to document how we secure power to our computer room," said Alex Davern, chief financial officer of National Instruments Corp., an Austin, Texas-based technology firm. "What does that have to do with accurate financial statements? If we break a computer, we'll notice."