Growth Strategies

Will Small Biz Get Sarbox Impunity?

A proposed investor-protection bill includes an exemption for small companies from the Sarbanes-Oxley auditor-attestation requirement.
Sarah JohnsonNovember 4, 2009

The House Financial Services Committee has passed a bill that would exempt just over half of all publicly traded companies from the contentious internal-control provision of the Sarbanes-Oxley Act that requires an auditor opinion.

The proposed exemption has a long way to go before smaller companies can drop plans to get their auditors to sign off on their internal controls over financial reporting, which they are scheduled to do for fiscal years ending next June 15 or later. It narrowly passed the committee Wednesday in a 37-32 vote for inclusion in the Investor Protection Act. However, the White House is reportedly backing the measure; according to several press reports, President Obama’s chief of staff, Rahm Emmanuel, pushed for it.

With its 41-28 vote in favor of the Investor Protection Act Wednesday, the House committee simultaneously boosted the Securities and Exchange Commission’s authority and somewhat stifled it.

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On the one hand, the legislation would double the SEC’s funding for the next five years, create a bounty program for whistle-blowers, and give the commission ways to reform itself in the wake of Bernard Madoff’s Ponzi scheme. However, the Sarbox exemption tacked on to the bill would override the SEC’s vow last month that smaller businesses would have to begin complying with the 2002 law’s Section 404(b), which requires companies to include in their 10-K reports an independent auditor’s opinion on their internal controls. Republicans on the committee who were against the amendment, proposed by Scott Garrett (R-N.J.) and John Adler (D-N.J.), defended investor criticism of it by saying nothing would really change since smaller businesses haven’t been fully complying with Sarbox.

Indeed, the SEC has given companies with market capitalizations below $75 million — which the SEC categorizes as nonaccelerated filers — several reprieves from 404(b) compliance. In fact, it was only last year that nonaccelerated filers began filing management assessments of internal controls with their 10-Ks.

The most recent delay on the auditor assessments of internal controls was announced in October, and SEC chairman Mary Schapiro promised it would be the last. “Since there will be no further Commission extensions, it is important for all public companies and their auditors to act with deliberate speed to move toward full Section 404 compliance,” she said at the time.

The Garrett-Adler amendment exempts all small issuers from 404(b) and requires the SEC to study how the regulator could reduce the cost-of-compliance burden for companies with market caps between $75 million and $250 million. The report would take into account whether such cuts would cause more businesses to list on U.S. exchanges.

Last month, after surveying larger companies on their experience with Sarbox compliance, the SEC concluded smaller businesses would have to pay disproportionately more, relative to their size, to comply with Section 404. The SEC reported that companies paid a mean total of $2.87 million when they first began adhering to Sarbox, and expect to pay a mean $2.03 million for their next internal-controls report.

The SEC has not publicly delved into the common, long-held belief that smaller companies have weaker internal controls. Neither have those in Congress who voiced their preference for the Garrett-Adler amendment.

Last year research firm Audit Analytics looked at the 3,435 public companies whose auditors did not opine on their controls — most of which were nonaccelerated filers — and the 4,012 companies that did file 404(b) opinions as of September 10, 2008. The study revealed that 30.7% of nonaccelerated filers reported they had ineffective controls, while just 7% of the larger companies received adverse opinions from their auditors on those controls.


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