For some years now, growing corporate debt has evoked much headshaking among financial observers, who have described it in terms ranging from “big concern” to “unexploded bomb,” and who now see its hazards greatly increased by the economic effects of the COVID-19 pandemic.
While extremely low interest rates are generally assigned most of the responsibility for the debt explosion, regulatory factors have been implicated as well. Now research in The Accounting Review newly identifies federal accounting regulations that have had the unintended effect of spurring indebtedness among one particular group of companies — small firms (in particular, those with a public float of $50 million to $75 million) that have sought to navigate among those rules to their advantage.
The rules in question are Section 404 of the Sarbanes-Oxley act of 2002 (SOX 404) and an exemption that permits small firms to avoid an expensive requirement of this provision. According