September 30, 2022
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While the federal government continues to dole out to financial giants, smaller public companies are finding it too expensive to stay on the nation’s big exchanges.

Santa Barbara-based The Walking Co., formerly Big Dogs, took itself off the Nasdaq on March 23. The company had incurred some big restructuring costs, and with only about 100 shareholders, it figured it could save hundreds of thousands of dollars a year.

In its filings, The Walking Co. singled out the cost of the Sarbanes-Oxley Act, an accounting law passed in 2002 in the wake the Enron and WorldCom scandals. The regulation requires the setup, documentation and testing of internal accounting controls and has become a bugbear of smaller public firms.

Chief Executive Andrew Feshbach said the law was written with big companies in mind and its fixed costs can land a heavy blow to smaller firms – even if they pull in the $242 million in revenue that The Walking Co. netted last year.

“There’s a lot of cost involved that’s not creating any value,” Feshbach said in an interview with the Business Times. “A company like ours is thought of by the government or by the people as a big company, but we’re actually a small company. Some of those regulations are very burdensome.”

The Securities and Exchange Commission itself has cited a 2005 study from the American Electronics Association that found companies with a market capitalization of less than $100 million paid more than 2.5 percent of their revenue in Sarbanes-Oxley compliance costs. Firms with more than $5 billion in market cap paid about 0.6 percent of their revenue, the study found.

Sarbanes-Oxley, or SOX as it’s known among financial insiders, has come in waves. First the controls had to be set up and then tested by outside auditors. That means big costs no matter the firm’s size.

“Not only do we have to audit the financial statements, now we have to audit the controls,” said Jeff Hass, a partner at Farber Hass Hurley & McEwen in Camarillo. “In simple terms, you’ll find that the auditor fees will often double from what a small company was paying before.”

On top of that, many small companies often don’t have the expertise to design the controls themselves. The SEC gave vague instructions for the mechanisms but spelled out stiff civil and criminal penalties for not complying.

As a result, Hass said, many small companies had to hire an outside firm to design the measures.

“The fees for complying can grow to two to three times to what they’re used to spending,” Hass said. “I think you’ll find a lot of companies deciding that if they have fewer than 300 shareholders, they should withdraw [from the big exchanges].”

But SOX has its defenders, even for smaller companies.

“The reemphasis back on internal controls was needed,” said Peter Iannone, a director in the Oxnard office of CBIZ. “We did not have a good track record as Corporate America, as regulatory agencies or as auditors in the years leading up to 2002.”

Iannone said he thinks the dot-com bubble showed the need for internal controls even at smaller public companies. Even though they weren’t large, some of the bogus tech firms from that era wiped out a lot of wealth.

“No one was complaining when these small companies were being bought by CalPERS and others,” Iannone said. “They were popping the champagne.”

But while Iannone said many of the controls imposed by SOX make good sense, he agrees the documentation costs can be high. To help remedy that, the SEC in 2007 unveiled Accounting Standard No. 5, which gives auditors more freedom to avoid unnecessary SOX costs for smaller companies.

“Instead of having to test all controls in all companies, it went to having a discussion with management of what are the risks that are inherent in their business and making sure that management has properly assessed those risks,” Iannone said.

But the new rule wasn’t enough for The Walking Co., which took on a $12 million loss last year as it shuttered its Big Dogs outlets to focus on footwear sales at its The Walking Co. stores.

With the biggest cuts in the executive office, the firm slashed employee pay across the board. It laid off more than 500 workers over the course of closing the Big Dogs outlets. The company said those moves will bring down overhead costs by about 20 percent, but it’s still asking its landlords to let it defer its rents and pay them out of this year’s profits.

The Walking Co. will still trade on the Over the Counter Bulletin Board and will file audited financial statements. Feshbach said he’s tried hard to make his business work in a tough retail environment and is frustrated by the government’s efforts to turn things around.

“There’s nothing really happening to create new jobs for healthy companies, incentivize companies or increase employment,” Feshbach said. “In fact, California’s getting much worse.”

Seeing billions go to big banks that took on toxic assets while he has to lay people off and cut pay is especially tough, Feshbach said.

“Until businesses can grow and create jobs, there’s not going to be an economic turnaround, whatever happens in banking or with bailouts,” he said.

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