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KBL Eisner, LLP |
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Auditors and investors lost the battle to get small public companies to comply with Section 404(b) of the Sarbanes-Oxley Act of 2002. Included in the recently signed Dodd-Frank Wall Street Reform and Consumer Protection Act is a provision that gives a permanent exemption to public companies with public floats of less than $75 million from having to obtain an auditors’ report on management’s assertion of the effectiveness of the company’s internal controls over financial reporting.
Over the years, the SEC has extended the exemption to small companies because of complaints about the rule's cost. But the waiver was set to expire in June after the SEC issued Release No. 33-9072, Internal Control Over Financial Reporting in Exchange Act Periodic Reports of Non-Accelerated Filers. An SEC study said Section 404 costs dropped by 30% after the first few years of compliance. Investors and auditors have long argued that the rule is essential in preventing financial fraud. In the past year-and-a-half, over 750 companies under the $75 million threshold have restated financial results. Despite this there were many who felt making small companies comply would have resulted in a detrimental impact on initial public offerings and that small companies would be unduly burdened by the compliance costs.
The Bill also directs a study to ascertain whether further relief can be found from the various reporting burdens of being public, including the possibility of exemption from SOX 404(b), for companies between $75 million and $250 million of public (non-affiliated) market capitalization.
The exemption will have no effect on management’s report on internal controls under Section 404(a) which is, and continues to be, required of all public companies. While in many cases, companies have enacted rigorous procedures to facilitate compliance with the 404(a) requirement, such procedures may have had to be supplemented to enable the issuance of an auditor’s report on internal controls.
For non-accelerated filers with year ends after June 15, 2010, for which SOX 404(b) was set to become effective, the provision comes with both a measure of relief and exasperation. While these companies are not now required to obtain an opinion, a significant amount of financial and operational resources have already likely been expended in preparing to do so. These companies should not consider their efforts wasted. Looming on the horizon is a change in PCAOB auditing standards which will require that the auditors, even when not expressing an opinion on internal controls, gain a better understanding of internal controls and perform some testing on such controls. The proposed risk assessment standards are still being deliberated, but could be required as early as the audits of 2011 calendar-year-end companies. |
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