Last November, we asked if 2006 would be the year of the non-accelerated filer. More recently one of our Washington & Wall Street articles discussed the SEC Advisory Committee's recommendations that non-accelerated filers be exempted from Section 404 the Sarbanes-Oxley Act of 2002.�

The answer to our question appears to be yes!

On May 17, 2006 the SEC ruled that all public companies, the majority of which�fall into the non-accelerated group of filers, must ultimately comply with the requirements of Section 404.� This news may cause yet another round of venom spitting on Wall Street, where our numerous investment banker, broker and financial planner friends are�in near revolt because of the effects of Regulation Fair Disclosure (FD), decimalization and the initial round of SOX compliance.

We hear mournful tales of how deals are being brought in exotic venues like London and Hong Kong, that those IPO windfall profits are rarer than hen's teeth and that the Street doesn't like SOX one little bit. But before all our Wall Street friends go accusing IRA of forgetting our finance industry roots and�label us�toadies of Washington D.C., please read on.

We believe that applying SOX to small companies may actually be good for Wall Street.� Specifically, we believe it is an enabler to getting the IPO pipeline moving again. �Bankers must get beyond the hurdle of capital markets stasis due to the fear of excess regulation.� And for IPO's, overcoming that fear is most important for the smaller companies that are critical to filling the public company IPO and M&A; pipeline. Getting Washington to resolve policies that have wounded the market by making Rule 404 solutions cost effective for the smallest firms means life can begin to move on.

Everyone please note that, on average, material restatements repairing errors on the books by companies pursuing SOX cleanliness more often than not resulted in that company's stock position ultimately improving as investors and analytics models regained faith in the registrant.

Also note that, by and large, SOX to date has revealed�little to indicate that the US economy is rampant with thieves and cut throats. If anything, this exercise in extraordinary due diligence affirms that the US market is a sound place to invest. Just ask all those private equity funds, which are now the true competitors of public IPOs, whether they really prefer executing their exit strategies on a non-US exchange.

In our opinion, Wall Street should be encouraging Washington to stop slowing down the process and get to a workable SOX answer already! So where do we go from here?

We believe that the solution falls squarely on the shoulders of the PCAOB, which did after all inherit the "adequacy of internal controls" certification torch from AICPA when the former agency was created by SOX.

At the core of it all is the issue of conducting systems and controls audits, and collecting attestation information, more efficiently. Here the choices seem to be to encourage the development of template based compliance tests versus insisting that auditors be strictly liable for conducting ongoing case study based compliance audits. One can be done by a computer that can be trained to become smarter about the questions it asks over time. The other will forever be a hand made film.

In our opinion the SEC and PCAOB would ultimately be best served by creating a computerized Condition of Internal Controls Report (CICR) collection system similar in nature to how bank regulators collect have collected CALL reports for decades.

Small companies are the driving factor forcing this to happen. Being smaller, they have a lot clearer picture of themselves and can attest to the adequacy of internal controls, identify and report on material weaknesses, and are well aware� off the tops of their heads�when they have changed something warranting a follow-up report.� In the end, that is what Rule 404 is all about. Why should it not be just like any other OMB approved form?

Crafting a better compliance mechanism�benefits big companies as well. Last year, after just one cycle of work that updated antiquated systems, SOX costs were cut in half. We suspect those firms which completed this process will be able to attest with better clarity and more cheaply as time goes on.

If the SEC and PCAOB push in the direction of, dare we say it, an XML based machine-to-machine interactive data submittal engine which enables companies to automate 404 attestation, then this entire episode of treating "knowing how your business controls itself" as a hindrance to new capital formation will be replaced by a more sensible "assets qualification" treatment line item on new IPO checklists.

And finally there's also relief for auditors�in streamlining the 404 process. They can move on from being the deputized law enforcement officers compelled by onerous liability exposures to force engagement clients to repeat the SOX 404 compliance exercise over and over again. Quite unlike external audits of financials that are unique "point-in-time" datasets, corporate internal controls clearly has learning curve and cumulative confidence properties.

Once the training wheels are off,�the business process work flow seems to indicate that the PCAOB should consider guiding the role of auditors to tailor their skills and�focus on examinations to track changes in internal controls as required by Rule 404 rather than re-certify clients from principles annually.

Questions? Comments? [email protected]