When Congress passed the Sarbanes-Oxley Act in 2002, we got it mostly right. In the wake of the Enron and WorldCom accounting scandals, we acted deliberately and relatively swiftly to enact legislation that sought to reform corporate governance laws and provide investors with renewed confidence. Five years later, there is compelling evidence that the central provisions of the Sarbanes-Oxley Act have resulted in meaningful steps forward and that investor confidence is restored.

In many ways, the Sarbanes-Oxley Act has brought a much-

needed improvement to our capital markets. By establishing the Public Company Accounting Oversight Board, Congress ended decades of self-regulation of the accounting profession. SOX also enhanced the independence of auditors by setting a number of limitations on the services that these audit firms can provide their clients. Finally, the act made executives and corporate board members more accountable for internal controls by requiring that these individuals be personally responsible for their firms’ financial reporting practices.

For the most part, the act has been beneficial. It has put emphasis on corporate governance practices and reminded public companies that they have a greater responsibility to their shareholders, their employees and society in general. At its core, the Sarbanes-Oxley Act ensures the information markets rely on to function is correct.

Somewhere between its passage and its implementation, however, something went terribly awry. Small companies — the catalyst for innovation and job creation — were left facing large compliance costs. According to the law firm Foley & Lardner, the annual cost of accessing the public markets for small companies has skyrocketed from $1 million in 2001 to almost $3 million in 2006. This 200 percent increase largely is attributed to Section 404 of the act, which requires companies to document and verify their internal controls for financial reporting. Complying with this section has become an anchor around the necks of small public companies.

So what does this mean for the U.S. economy? It means that entrepreneurs are hiring auditors instead of engineers. It means that local companies are considering going public on foreign markets, or more likely, going private. It means that the small businesses have to be more creative — and overcome greater challenges — to raise the capital they need. While many will continue to cite the corporate governance benefits of the act, the reality is that a problem exists.

Like killing a mosquito with a hammer, the implementation of SOX 404 has used too much tool for the job. Small companies have been overwhelmed by the costs associated with SOX 404. Recognizing that a problem exists, the Securities and Exchange Commission and PCAOB have spent the better part of four years trying to craft a solution. But it appears it is too little, too late.

Until recently, the SEC had delayed the date by which smaller public companies must come into compliance with Section 404. The SEC had issued the delays because of concerns about its disproportionate burden on smaller public companies. This summer the SEC approved new rules regarding Section 404 and established a deadline by which all public companies must come into compliance. The SEC’s compliance timeline forces smaller public companies to begin incurring SOX 404 costs before the SEC has done the requisite analysis. Such an assessment would allow the commission to determine whether these new rules are likely to address concerns about the disproportionate burden that SOX 404 places on small companies.

Throughout the process, I have remained hopeful that the regulators would listen and act in response to small companies’ concerns. After all, this is a problem that can and should be solved by those implementing SOX — the SEC and the PCAOB. But little has been done that would give me the confidence that this is the case.

Biotech firms, community banks and small manufacturers, among others, continue to call for an additional delay that will allow cost data to be collected and the new rules to be assessed before they are forced to comply with them. Recent statements by the SEC leave troubling ambiguity about whether small firms can rely on the commission for these purposes. I am increasingly convinced that Congress will need to act to provide tailored relief for smaller public companies.

The next few months will be pivotal. During this time, small companies will begin to come into compliance with portions of Section 404 for the first time. The SEC must carefully monitor the impact of this and establish a plan for the implementation of the balance of Section 404. The data that is collected should be thoroughly analyzed and released to the public.

Unless there is evidence that SOX 404 compliance costs are no longer disproportionately burdensome for smaller firms, I believe Congress must take action. It makes little sense to force these companies to choose between complying with federal regulation and discovering the next technological marvel or medical breakthrough. There is too much at stake to risk short-circuiting our nation’s small-business economy.

Rep. Nydia Velázquez (D-N.Y.) is chairwoman of the Small Business Committee and a member of the Financial Services Committee.