The House Capital Markets Subcommittee has approved legislation expanding 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 to a $350 million public float. Representative Stephen Fincher (R-TN) introduced the legislation.
As originally introduced, the Small Company Job Growth and Regulatory Relief Act would have expanded the exemptions available to small companies from the Section 404(b) auditor attestation reporting requirements to 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 Act. During the mark-up, the House panel amended the bill with a bi-partisan vote that lowered the market float from $500 million to $350 million pursuant to an amendment offered by Rep. John Campbell (R-CA). The final vote reporting the bill out was partisan, with no Democrats on the subcommittee supporting the legislation.
Supporters of increasing the $75 million cap believe that duplicative audit requirements hinder many companies from going public, noted Rep. Fincher, and going public provides opportunities for companies to raise desperately needed capital in order to expand, reinvest, and create jobs. Opponents argue that changing the auditing requirements would lead to corporate fraud and shift us back to the days of Enron and World Com. But Congressman Fincher believes ``we can have our cake and eat it too on this issue.'' He assured that the legislation would not eliminate corporate audits or internal controls; just auditing of the internal controls of companies that could use their scarce resources to expand their business, while at the same time preserving the goal of Sarbanes-Oxley, which is to ensure that large and complex companies, which brought us Sarbanes-Oxley in the first place, continue to be subject to these additional audits.
In a recent joint letter to House Financial Services Chair Spencer Bachus (R-ALA), the Center for Audit Quality and the Council of Institutional Investors opposed the legislation. The groups said that 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.