SEC Official Discusses 404(b) as Draft Legislation Would Exempt Companies with up to $500 million Market Cap from 404(b)

As the SEC staff works with the PCAOB to monitor auditor inspection results on 404(b) internal controls, U.S. Representative Stephen Fincher (R-TN) 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 Act. 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. Congressman 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. SEC Corporation Finance Director Meredith Cross testified before the Capital Markets subcommittee that Dodd-Frank amends the Section 404 requirements to provide that smaller companies (specifically those that are not "accelerated filers" or "large accelerated filers" are exempt from the requirement in Section 404(b) that an independent auditor attest to, and report on, the issuer's assessment of its internal controls. As a result, more than 60% of companies filing reports with the Commission, those with the smallest public float, are now exempt from the internal controls audit requirement. The Director also noted that the staff encourages activities that have the potential to further improve both the effectiveness and the efficiency of the evaluation of internal controls, while maintaining important investor protection safeguards. For example, with this objective in mind, the staff continues to work with the PCAOB to monitor inspection results and assess the extent to which publishing observations can be useful. The staff is also observing COSO's project to review and update its internal control framework, which is the most common framework used by management and auditors alike in performing assessments of internal control over financial reporting.

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