Thursday, September 29, 2011

CAQ and the CII Oppose Pending House Legislation Raising the Public Float Exemption for Compliance with Sarbanes-Oxley 404(b)

The Center for Audit Quality and the Council of Institutional Investors oppose pending legislation that would expand the exemption from Sarbanes-Oxley Section 404(b), which requires an independent audit of a company’s assessment of its internal controls as a component of its financial statement audit, beyond the $75 million public float provided by the Dodd-Frank Act. In a joint letter to House Financial Services Chair Spencer Bachus (R-ALA), the groups said that effective internal controls have become more central to the financial statement audit, a fact that has contributed to an increase in overall audit quality in the years since the passage of the Sarbanes-Oxley Act. CAQ and the CII believe that all investors should receive equal protections with respect to the effectiveness of internal control over financial reporting by publicly traded companies.

U.S. Representative Stephen Fincher (R-TN) has introduced draft legislation, The Small Company Job Growth and Regulatory Relief Act, expanding the exemptions available to small companies from the Section 404(b) auditor attestation reporting requirements of the Sarbanes-Oxley Act. The Act would expand the Sarbanes-Oxley 404(b) exemptions for small and mid-size companies with a market capitalization of less than $500 million. The exemption is currently at the $75 million cap set by the Dodd-Frank Ac

CAG and the CII emphasized that the processes associated with attesting to a company's internal control effectiveness have become more integrated into the financial statement audit and, as a result, are more cost-efficient than in the early days of Sarbanes-Oxley Act implementation. Additionally, the original PCAOB standard that implemented auditor attestation of effective internal controls (AS2) was revised in 2007 to allow for greater efficiencies, and the SEC also issued guidance to management on the implementation of Section 404, both of which contributed significant cost savings after the first few years of SOX implementation.

While recognizing efforts to address redundant and unnecessary regulation that provides little value, the groups believe effective internal controls to be a critical component of the financial statement audit. The financial statement audit, in turn, continues to be important to well-functioning capital markets by improving the quality of, and confidence in, the financial reports provided to investors and other stakeholder.

They noted that Section 989G(b) of the Dodd-Frank Act required the SEC to conduct a study to determine how the SEC could reduce the burden of complying with Section 404(b) for companies whose market capitalization is between $75 and $250 million, while at the same time maintaining investor protection. In the resulting study, the SEC concluded that the existing requirements for issuers with a $75-$250 million public float to comply with the auditor attestation provisions of Section 404(b) should be maintained and that no new exemptions should be granted. Specifically, the SEC found strong evidence that the auditor‘s role in auditing the effectiveness of Internal Control for Financial Reporting] improves the reliability of internal control disclosures and financial reporting overall and is useful to investors.

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