Final Report of the ......................................................... AADDVVIISSOORRYY ......................................................... CCOOMMMMIITTTTEEEE ......................................................... OONN ......................................................... SSMMAALLLLEERR ......................................................... PPUUBBLLIICC ......................................................... CCOOMMPPAANNIIEESS ......................................................... To the United States Securities and Exchange Commission April 23, 2006 SEC FINAL REPORT OF THE ADVISORY COMMITTEE ON SMALLER PUBLIC COMPANIES TO THE U.S. SECURITIES AND EXCHANGE COMMISSION April 23, 2006 Final Report of the Advisory Committee on Smaller Public Companies to the U.S. Securities and Exchange Commission TABLE OF CONTENTS TRANSMITTAL LETTER......................................................................................................iii MEMBERS, OFFICIAL OBSERVERS AND STAFF OF ADVISORY COMMITTEE........v EXECUTIVE SUMMARY.......................................................................................................1 PART I. COMMITTEE HISTORY.......................................................................................10 PART II. SCALING SECURITIES REGULATION FOR SMALLER COMPANIES.......14 PART III. INTERNAL CONTROL OVER FINANCIAL REPORTING.............................23 PART IV. CAPITAL FORMATION, CORPORATE GOVERNANCE AND DISCLOSURE........................................................................................................................59 PART V. ACCOUNTING STANDARDS..........................................................................102 PART VI. SEPARATE STATEMENT OF COMMITTEE CO-CHAIRS, JAMES C. THYEN AND HERBERT S. WANDER..............................................................................122 PART VII. SEPARATE STATEMENT OF MR. JENSEN................................................130 PART VIII. SEPARATE STATEMENT OF MR. SCHACHT...........................................135 PART IX. SEPARATE STATEMENT OF MR. VEIHMEYER........................................142 i APPENDICES......................................................................................................................147 A. Official Notice of Establishment of Committee B. Committee Charter C. Letter from Committee Co-Chairs to SEC Chairman Christopher Cox dated August 18, 2005 D. Committee Recommendations by Category E. Background Statistics: Market Capitalization and Revenue of Public Companies F. Universe of Publicly Traded Companies and Their Governance G. SEC Press Release Announcing Intent to Establish Committee H. SEC Press Release Announcing Full Membership of Committee I. Committee By-Laws J. List of Witnesses K. Committee Agenda L. SEC Statement of Policy on Accounting Provisions of Foreign Corrupt Practices Act ii SEC ADVISORY COMMITTEE ON SMALLER PUBLIC COMPANIES Washington, DC 20549-3628 April 23, 2006 The Honorable Christopher Cox Chairman Securities and Exchange Commission 100 F Street, NE Washington, DC 20549-1070 Dear Chairman Cox: It is our pleasure and privilege to present to you, and the other Commissioners, on behalf of the Advisory Committee on Smaller Public Companies, our Final Report and recommendations. Our Committee has devoted thirteen months to this effort, and we have on numerous occasions solicited public input at various hearings around the country and through written commentary. We believe the extensive information gathered will be extremely useful to the Commission in analyzing our Final Report and hopefully in implementing our recommendations. In our Final Report, we have identified a number of studies analyzing the cost and effect of Sarbanes-Oxley, but we have not attempted to validate the methodology of these studies. We commend the Commission for its initiative in creating the Committee, in shaping its broad charter and in supporting its labors. You were generous in furnishing staff. We trust that our Final Report and recommendations are worthy of the support and resources which you gave. We truly want to thank the staff members whose participation was invaluable. These include: John W. White Anthony G. Barone Alan L. Beller Jennifer M. Burns Martin P. Dunn Mark W. Green Mauri L. Osheroff Kathleen Weiss Hanley Gerald J. Laporte William A. Hines Kevin M. O’Neill Alison Spivey Cindy R. Alexander Lori S. Walsh iii We also wish to exptess our gratitude md appeciation to.our,threeO fficial Observers whose participation and counsel greatly efihanced our effu~s: George J. Batavick Daniel L. Goelzer Jack E, Herstein Each of the Committee members stands ready to lend whatever further assistance we may be able to render in carrying out the recommendations of this Final Rep6rt. Respectfully submitted on behalf the Committee, Herbert S. Wanda Committee Co-Chair cc: Commissioner Cynthia A, GJassman Commissioner Paul S. Atkins Commissioner Roe1 C. Campos Commissioner Annette L. Nazareth John W. White Nancy M. Moms Gerald J. Laporte MEMBERS, OFFICIAL OBSERVERS AND STAFF OF ADVISORY COMMITTEE Members: Herbert S. Wander, Co-Chair Partner, Katten Muchin Rosenman LLP (Ex Officio Member of All Subcommittees and Size Task Force) James C. Thyen, Co-Chair President and CEO, Kimball International, Inc. (Ex Officio Member of All Subcommittees, Chairperson of Size Task Force) Patrick C. Barry Chief Financial Officer and Chief Operating Officer, Bluefly, Inc. (Accounting Standards Subcommittee, Size Task Force) Steven E. Bochner Partner, Wilson Sonsini Goodrich & Rosati, Professional Corporation (Chairperson, Corporate Governance and Disclosure Subcommittee) Richard D. Brounstein Executive Vice President and Chief Financial Officer, Calypte Biomedical Corp. (Internal Control Over Financial Reporting Subcommittee) Pastora San Juan Cafferty Professor Emerita, School of Social Service Administration, University of Chicago (Corporate Governance and Disclosure Subcommittee) C.R. Rusty Cloutier President and Chief Executive Officer, MidSouth Bancorp, Inc. (Corporate Governance and Disclosure Subcommittee) James A. “Drew” Connolly III President, IBA Capital Funding (Capital Formation Subcommittee) E. David Coolidge, III Vice Chairman, William Blair & Company (Chairperson, Capital Formation Subcommittee) Alex Davern Chief Financial Officer and Senior Vice President of Manufacturing and Information Technology Operations, National Instruments Corp. (Internal Control Over Financial Reporting Subcommittee, Size Task Force) v Joseph “Leroy” Dennis Executive Partner, McGladrey & Pullen (Chairperson, Accounting Standards Subcommittee) Janet Dolan Former Chief Executive Officer, Tennant Company (Chairperson, Internal Control Over Financial Reporting Subcommittee) Richard M. Jaffee Chairman of the Board, Oil-Dri Corporation of America (Corporate Governance and Disclosure Subcommittee, Size Task Force) Mark Jensen National Director, Venture Capital Services, Deloitte & Touche (Internal Control Over Financial Reporting Subcommittee) Deborah D. Lambert Co-Founder, Johnson Lambert & Co. (Internal Control Over Financial Reporting Subcommittee) Richard M. Leisner Partner, Trenam Kemker (Capital Formation Subcommittee, Size Task Force) Robert E. Robotti President and Managing Director, Robotti & Company, LLC (Corporate Governance and Disclosure Subcommittee) Scott R. Royster Executive Vice President & Chief Financial Officer, Radio One, Inc. (Capital Formation Subcommittee) Kurt Schacht Executive Director, CFA Centre for Financial Market Integrity (Internal Control Over Financial Reporting Subcommittee) Ted Schlein Managing Partner, Kleiner Perkins Caufield & Byers (Capital Formation Subcommittee) John B. Veihmeyer Deputy Chairman, KPMG LLP (Accounting Standards Subcommittee) vi Official Observers: George J. Batavick Member, Financial Accounting Standards Board (FASB) (Accounting Standards Subcommittee) Daniel L. Goelzer Member, Public Company Accounting Oversight Board (Internal Control Over Financial Reporting Subcommittee) Jack E. Herstein Assistant Director, Nebraska Bureau of Securities (Capital Formation Subcommittee) SEC Staff: John W. White Director (beginning March 2006) Division of Corporation Finance Alan L. Beller Director (until February 2006) Division of Corporation Finance Martin P. Dunn Deputy Director Division of Corporation Finance Mauri L. Osheroff Associate Director (Regulatory Policy) Division of Corporation Finance Gerald J. Laporte, Committee Staff Director Chief, Office of Small Business Policy Division of Corporation Finance Kevin M. O’Neill, Committee Deputy Staff Director Special Counsel, Office of Small Business Policy Division of Corporation Finance Cindy R. Alexander Assistant Chief Economist, Corporate Finance and Disclosure Office of Economic Analysis vii Anthony G. Barone Special Counsel, Office of Small Business Policy Division of Corporation Finance Jennifer M. Burns Professional Accounting Fellow Office of the Chief Accountant Mark W. Green Senior Special Counsel (Regulatory Policy) Division of Corporation Finance Kathleen Weiss Hanley Economic Fellow Office of Economic Analysis William A. Hines Special Counsel, Office of Small Business Policy Division of Corporation Finance Alison Spivey Associate Chief Accountant Office of the Chief Accountant Lori S. Walsh Financial Economist Office of Economic Analysis viii