Nov. 2 (Bloomberg) -- The Obama administration is pushing House Democrats to spare small public companies the cost of complying with investor-protection rules imposed after the accounting frauds at Enron Corp. and WorldCom Inc., according to people familiar with the efforts.

Chief of Staff Rahm Emanuel is seeking the reprieve from audit requirements under the 2002 Sarbanes-Oxley Act, the people said. Representative Carolyn Maloney plans to add the exemption, postponing compliance fees for firms with market values of less than $75 million, to a bill overhauling financial rules.

The administration may be seeking the delay, which investor advocates oppose, to help Democrats retain control of Congress, said James Cox, a law professor at Duke University in Durham, North Carolina. Unemployment climbed to a 26-year high of 9.8 percent in September, putting pressure on the Obama administration to bring it down before the 2010 elections.

“The Democrats are getting clobbered over the unemployment rate,” he said. “In a recovery, a vastly disproportionate number of new hires are made by small businesses. The White doesn’t want to be perceived as doing things that hurt those companies.”

Maloney, a New York Democrat, is seeking a delay in compliance until 2011. Her measure would amend legislation the House Financial Services Committee will debate this week that increases SEC funding and imposes stiffer regulations on brokerage firms.

Emanuel Supports Amendment

Emanuel, a former congressman who in 2006 helped his party win control of the House, has made it clear to Democrats on the financial services panel that he supports Maloney’s amendment, said the people, who declined to be identified because the discussions were private.

White House Spokesman Jen Psaki said the administration is working with Congress to pass financial regulatory legislation to “prevent the kind of irresponsibility that caused the recession of the past two years.” She declined to comment on Emanuel’s conversations with lawmakers.

U.S. Representative John Adler, a New Jersey Democrat, has proposed going further. His amendment would exempt companies with market values below $700 million from the audit rules until the SEC can figure out how to reduce their compliance costs.

Lawmakers in 2002 passed Sarbanes-Oxley, imposing checks on corporate financial statements after meltdowns at Enron and WorldCom shattered investor confidence. The law requires companies to have adequate safeguards to prevent misstatements and make sure employees don’t falsify results. Controls must be scrutinized and assessed by an outside accounting firm.

Disproportionate Burden

Business groups and venture-capital firms, which profit by investing before companies sell shares to the public, argue that the law imposes a disproportionate burden on smaller companies.

The U.S. Securities and Exchange Commission in 2007 revised the requirements to reduce compliance costs after Treasury Secretary Henry Paulson questioned whether Sarbanes-Oxley was driving companies to sell shares overseas.

The SEC has never required compliance for businesses with market capitalizations below $75 million, providing multiple exemptions dating to 2004.

SEC Chairman Mary Schapiro last month granted a further reprieve, giving small firms until next year to start paying auditors to scrutinize their internal controls. There won’t be any more SEC extensions, she said in an Oct. 2 statement.

Small companies voluntarily adhering to the audit requirements said they spent $690,219 on average in their most recent fiscal year, according to an SEC survey in October. Businesses with market capitalizations from $75 million to $700 million spent $1 million and the largest U.S. corporations spent $3.99 million, the SEC said.

Obama Proposal

President Barack Obama has been urging Congress to approve legislation that requires the biggest financial companies to finance bank rescues and increases regulation of derivatives and hedge funds, among other measure to revamp the market rules.

The White House officials say the administration is seeking to eliminate gaps in oversight that last year triggered the failure of Lehman Brothers Holdings Inc. and bailouts of companies including American International Group Inc. and Citigroup Inc.

“In 2002, in the midst of the tech bust and Enron corporate scandal, Democrats publicly flogged Republicans for not supporting the reforms Democrats are now working to undo,” said Lynn Turner, a former SEC chief accountant. “It seems outrageous that the Democrats in Congress and the White House are working so hard to use the current crisis to now undo these past reforms that have been proven to protect investors.”

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Last Updated: November 2, 2009 16:49 EST