Statement of Michael R. See, Assistant Chief Counsel for
     Advocacy of the U.S. Small Business Administration
          before the U.S. House of Representatives,
               Committee on Government Reform,
             Subcommittee on Regulatory Affairs
                         May 3, 2006

Good morning, my name is Michael See, and I have the
pleasure of serving as assistant chief counsel for advocacy
of the U.S. Small Business Administration.  I will open
simply by giving brief background to the other participants
and the distinguished members on my work, and my office's
involvement in rulemaking under the Sarbanes-Oxley Act of
2002.

As assistant chief counsel for advocacy, I am charged with
reviewing Federal agency actions-including those by the U.S.
Securities and Exchange Commission-to ensure their
compliance with the Regulatory Flexibility Act of 1980 (the
RFA).  Generally, the RFA requires agencies to consider the
costs of their actions to small businesses, and to analyze
regulatory alternatives that would reduce those costs while
achieving the agencies' regulatory objectives.  The Office
of Advocacy is charged with overseeing agency compliance
with the RFA.  Through the Office of Advocacy's intervention
at various stages of the rulemaking process, in 2005, the
Office of Advocacy helped secure more than $6.6 billion in
regulatory cost savings for small business.

Small business plays a vital role in our economy.  They
generate between sixty and eighty percent of net new jobs
annually, produce thirteen to fourteen times more innovative
patents per employee than large firms, and employ half of
all private sector employees.  Yet these firms face
disproportionate regulatory costs.  Firms with less than
twenty employees spend approximately forty-five percent more
per employee to comply with Federal regulations than larger
firms.

My involvement with the Sarbanes-Oxley Act began in 2002,
when our office asked Chairman Oxley and Chairman Sarbanes
to include flexibility in the bill then being considered
that would be sufficient to avoid unnecessary impacts to
small businesses.  As the U.S. Securities and Exchange
Commission (the Commission) began its rulemaking process to
implement the various sections of the Act, my office
advocated on behalf of small businesses, first in the
rulemaking requiring CEO certifications, then in later
proposed rules that would have required small audit firms to
rotate partners on audits every few years, and finally on
rules that would require small public companies to obtain
outside audits of their internal controls-also known as
section 404.

Almost immediately upon its passage, small business
representatives contacted the Office of Advocacy to inform
us of their concerns with the new audit requirements of
section 404.  The main concern was that, as auditors were
faced with a new requirement to sign off on a company's
internal controls, they would employ expensive and time-
consuming audit procedures.  These concerns were born out by
experience, as surveys of actual compliance costs indicate
the new audits are indeed costly.  For example, the most
recent quarterly survey by Financial Executives
International indicates that companies that have less than
$75 million in capitalization spent almost $1,000,000 each
in one year's section 404 costs.

To its credit, after passing the rules, the Commission
quickly realized the expenses inherent in complying with
section 404, and delayed the implementation of section 404
for small businesses, pending a review of its impacts by a
formal Federal advisory committee, the Advisory Committee on
Smaller Public Companies (the Advisory Committee).  After a
year of deliberations and solicitation of public input, the
Advisory Committee made its final written recommendations
late last month.  Among these recommendations was a proposal
to delay the implementation of section 404 among small
public companies until such time as cost-effective
accounting methods had been established and the new
requirements did not represent a barrier to entry for small
firms.

The Office of Advocacy of the U.S. Small Business
Administration supports the Advisory Committee's
recommendation to delay small business implementation of
section 404.  Attached to these comments is a letter sent
this past week to the Commission outlining the Office of
Advocacy's concerns, and highlighting the abundant evidence
collected by the Advisory Committee on the harm to
competition that could occur if the Commission were to
extend section 404 to small businesses.  I look forward to
your questions.