GAO Eyes ‘Targeted, Limited’ 404 Relief

Also expresses concern with a lack of clarity in recent recommendations by the SEC's Advisory Committee on Smaller Public Companies.
Helen ShawMay 9, 2006

Smaller companies are indeed paying disproportionately higher auditing costs to implement the Sarbanes-Oxley Act, according to a new report by the Government Accountability Office. The GAO added, however, that any relief granted by the Securities and Exchange Commission should be “targeted and limited.”

The congressional watchdog agency issued its report in advance of a second roundtable on Sarbanes-Oxley Section 404, to be conducted on Wednesday by the SEC and the Public Company Accounting Oversight Board.

The GAO report expressed concern with a lack of clarity in recent recommendations by the SEC’s Advisory Committee on Smaller Public Companies. For example, the committee did not address what an internal control framework for smaller public companies would entail, noted the GAO, which also observed that most problems in implementing Section 404 derived from implementation issues and not from the framework itself.

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The advisory committee also would grant to some smaller public companies a full or partial exemption from Section 404 “unless and until” an appropriate framework is developed for assessing those companies’ internal control over financial reporting. The vagueness of “unless and until” concerned the GAO, which noted that thousands of companies might qualify for a full exemption.

“Some interim regulatory relief on a limited scale may be appropriate,” stated the report, but “a significant reduction in scope of the proposed relief” would be required “to preserve the overriding investor-protection purpose of the Sarbanes-Oxley Act.”

Although the financial costs of Sarbanes-Oxley have prompted some smaller companies to go private, wrote the GAO, the act has had a positive impact on investor protection. Higher audit fees paid by smaller companies, it added, have resulted from their lack of expertise and experience with formal internal control frameworks. The agency also reported that more than 80 percent of companies responding to a GAO survey reported that Sarbanes-Oxley had no effect, or they had no basis to assess the effect, on their ability to raise equity or debt financing.

The GAO advised SEC Chairman Christopher Cox to assess whether more guidance is needed to help management assess internal controls over financial reporting. The agency also recommended that the SEC and the PCAOB coordinate to ensure that the relevant guidance for management and standards for auditors are consistent.