Executive vice president and general counsel of the Nasdaq Stock Market Inc. Edward Knight says that although effective public disclosure is critical, today’s rules are particularly burdensome on smaller companies.

Speaking to a meeting of the U.S. Securities Exchange Commission Advisory Committee of Smaller Public Companies. Knight told the committee, “We now believe that there is universal agreement that we need to pause in new rulemaking and assimilate all the rulemaking that has occurred over the past three years. This is not the time to put more burdens on boards. If anything, we will be trying to clarify and even simplify our rules, especially for smaller companies.”

Knight says the majority of Nasdaq’s companies supports Sarbanes-Oxley, but because the implementation rules do not consider complexity and size, smaller companies face excessive compliance and control requirements compared to larger companies. This is especially true with respect to Section 404 of Sarbanes-Oxley, which relates to a company’s internal controls.

“The burdens of 404 implementation are not always commensurate to its benefits, especially with regard to smaller public companies,” adds Knight. “Based upon a survey of our companies, as a percent of revenue, smaller issuers appear to have spent approximately 11 times more than larger companies on 404 compliance.”

Knight says smaller companies are also finding it difficult to meet filing deadlines. “Since auditor resources are stretched thin, the set of smaller companies that do retain national auditors often receive less attention and are put on a lower priority track than larger companies. This makes it more difficult for smaller companies to get back on track within a reasonable time period after they have had a late filing,” says Knight.

He adds, Nasdaq issued 60 delisting letters to issuers, which failed to file on time, while last year only 14 companies were late.

Knight also points out that in a highly competitive market for talent, small companies are finding it difficult to match large company compensation, making it hard to retain qualified CFO’s, finance staff, and internal auditors.

“For some companies these issues and others add up to a conclusion that being a public company is not for them,” continues Knight, adding that in the first quarter of this year, 22 Nasdaq issuers voluntarily delisted, compared to only seven in the same period in 2004. “In each of these cases, the companies explained their decisions by citing the increasing regulatory costs associated with being public.

“If small businesses forgo the lower cost capital-raising opportunities afforded by the public markets, it will, in the long term, have adverse effects on the economy,” warns Knight.

However, according to Knight, Nasdaq does consider Sarbanes-Oxley necessary. “We are advising all our listed companies to consider 404 and Sarbanes-Oxley as an opportunity to continue to improve their financial reporting, governance and enterprise risk management. We are urging them to embrace it as part of their culture and use it as a way to minimize compliance risk in general,” stresses Knight.

Knight suggested five changes he hopes will be considered in the near term, including: providing the accounting firms with incentives to stay away from over-auditing; raising the level of materiality used for planning the scope of the 404 audit and what must be reported as material; permitting different forms of evidence that an effective control has been executed and alternating the frequency of control testing; staggering internal control assessments to mid-year to alleviate the year-end rush to evaluate internal control deficiencies and allow more flexibility for issuers to successfully implement remediation plans; and embracing the recommendations of the task force developing a framework tailored for small businesses.