SEC Approves Audit Exemption for Smaller Firms

Requiring smaller companies to have their internal controls audited "may not be an efficient way of benefiting and protecting investors."
Matthew HellerMay 9, 2019
SEC Approves Audit Exemption for Smaller Firms

The U.S. Securities and Exchange Commission has moved a key step closer to eliminating an auditing requirement for smaller companies as part of its effort to incentivize businesses to use the public capital markets.

At its meeting on Thursday, the SEC voted 3-1 to advance a proposed rule that would exempt smaller reporting companies (SRCs) from outside audits of their internal controls for preventing accounting errors and fraud.

Under the Sarbanes-Oxley financial reforms of 2002, such ICFR audits are required for public companies categorized as either accelerated or large accelerated filers. As a result of amendments adopted last year, some companies were classified as both SRCs and accelerated or large accelerated filers, making them subject to ICFR audits.

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The amendments approved on Thursday exclude from the accelerated and large accelerated filer definitions “an issuer that is eligible to be an SRC and had no revenues or annual revenues of less than $100 million in the most recent fiscal year for which audited financial statements are available.”

“The proposed rules build on the JOBS Act of 2012 and are aimed at a subset of smaller companies where the additional requirement of an ICFR auditor attestation may not be an efficient way of benefiting and protecting investors,” SEC Chairman Jay Clayton said in a news release.

“Investors in these lower-revenue companies will benefit from more tailored control requirements,” he added, suggesting that many of them, including those in the biotech and health care sectors, “will be able to redirect the savings into growing their companies by investing in research and human capital.”

As The Wall Street Journal reports, “Republicans in Congress and industry groups such as the U.S. Chamber of Commerce have long advocated repealing or easing the auditing requirements, arguing that expensive audits would deter businesses from becoming public companies.”

A bill that passed the Republican-controlled House in 2017 would have excluded any public company with a market capitalization of $500 million or less from the ICFR audit requirement.

The proposed SEC rule will now be subject to a 60-day public comment period.