Tightened federal accounting rules that will kick in in 2006 will be burdensome.

By Ellen Rosen

The New York Times

Bluefly, the online discount retailer based in New York that has about 75 employees and $43.8 million in annual sales, has yearly auditing costs of about $150,000.

But when a provision of the Sarbanes-Oxley Act of 2002 requiring documentation and auditing of internal controls -- known as Section 404 -- becomes effective for smaller companies in 2006, Bluefly Chief Financial Officer Patrick Barry expects audit costs to triple or even quadruple.

That could put a major financial burden on the company.

Sarbanes-Oxley, enacted to clean up corporate accounting after the Enron collapse, instead is cleaning out many small publicly traded companies. Because of that, the Securities and Exchange Commission has appointed an advisory committee to evaluate ways to ease the regulatory overload. That panel is holding a series of hearings nationwide.

Bluefly, which is listed on Nasdaq, says it has no plan to go private to escape Sarbanes- Oxley`s stringent financial disclosure rules the way hundreds of other companies have. But Barry said he hopes the SEC will alter its interpretation of the law ``so that the same rules don`t apply to $50 million companies that apply to the GEs of the world.``

He suggests a set ``of guidelines with requirements less stringent`` than those for a larger company. ``We don`t, for example,`` said Barry, ``have an internal audit committee. Like other small companies, it`s just me.``

Big corporations are complaining about Sarbanes-Oxley, too. But there is little question that the financial burden of compliance falls more heavily on smaller firms. An April Nasdaq study found that, as a percentage of revenue, ``companies that have revenues less than $100 million spent 11 times more than companies with revenues of $2 billion or more.``

Another study, released in March by Financial Executives International, a professional association for corporate financial officers, said costs averaged $824,000 for companies with annual revenues under $100 million, compared with $1,572,933 for companies with sales ranging from $100 million to $500 million.

Those costs and other regulatory rules led the SEC to establish an advisory committee for smaller public companies, said Gerald G. Laporte, who heads the agency`s Office of Small Business Policy.

Barry is one of the committee`s 21 members, who include lawyers, accountants, venture capitalists and corporate executives.

While the scope of the panel`s examination will include other regulatory hurdles faced by small businesses, most of the attention will be focused on the SEC`s Sarbanes-Oxley interpretation.

``Everybody likes Sarbanes- Oxley from the 30,000-foot level because it gives an aura of protecting the investor,`` said committee member Richard D. Brounstein, CFO of Calypte Biomedical in Pleasanton, Calif. ``But look at how it`s applied. Is it being applied cost-effectively? Is there a way to protect the investor in a way that makes more sense for a smaller company?``

With more small public companies returning to private status and untold numbers of start-ups questioning whether the cost of going public is worth it, an air of urgency surrounds the proceedings.

``Small businesses are the innovators -- the ones that can act quickly and create jobs,`` said Chicago securities lawyer Herbert Wander, who shares the chairman`s job with James C. Thyen, chief executive of Jasper, Ind.-based Kimball International, a maker of furniture and electronics assemblies. ``There is a fear or suspicion that if they are highly regulated, you won`t have publicly held smaller companies,`` said Wander.

The biggest question for small public companies is the impact of Section 404, which requires their chief executives and chief financial officers to evaluate the adequacy of their financial controls. While many of the nation`s big companies have filed these reports, many small companies have qualified as ``nonaccelerated filers`` under SEC rules and received a reprieve until 2006 or 2007, depending on when their fiscal years end.

Complying with Section 404 has, as Wander put it, ``gotten everyone jittery.`` Barry of Bluefly estimates that the company, which must comply next year, ``will need to hire a third party to document and test our controls, so that I can opine when our auditor, PricewaterhouseCoopers, comes that our controls are adequate.``

Furthermore, ``some businesses are more complex even though they are relatively small in size,`` which also could add to costs, says Richard M. Leisner, a Tampa, Fla., attorney who is a member of the committee.

For example, ``the costs may be cheaper if the company is centralized, but if there are plants overseas, which a lot of companies have, it may add to the costs because of multiple systems,`` says Joseph Dennis, a Minneapolis accounting executive and another committee member. Those expenses may not be the best use of a small company`s revenue.

``At the end of the day, what do shareholders do with that information -- that we have documented our billing systems? It may be better to reinvest the capital back in the company,`` said Barry.