On Thursday, the Securities and Exchange Commission’s Advisory Committee on Smaller Public Companies officially approved recommendations intended to ease the task of complying with key provisions of the Sarbanes-Oxley Act for thousands of small public companies. The recommendations will be submitted to the SEC for consideration by the end of this week.
The most significant recommendation would exempt roughly 70 percent of all U.S. companies from complying with Section 404 — which requires that they assess their internal controls over financial reporting. Unlike draft versions of the report, however, the final report emphasizes that exemptions would not necessarily be permanent, but are needed “unless and until” a more suitable framework for small company internal controls is developed.
In its report, the committee proposed to exempt certain companies from Section 404; specifically, microcap companies with less than $125 million in annual revenue and small-cap companies with less than $10 million in annual product revenue that adhere to certain other standards and codes of ethics.
Supporters of the committee’s work have complained that opponents and the media seized on the topic of exemptions, rather than considering the need for guidance tailored to smaller companies. Indeed, according to a summary of the committee’s final meeting compiled by Financial Executives International, at least one committee member regretted using the word “exemption.” Janet Dolan, chair of the committee’s internal-control reporting subcommittee, lamented that the word had become “a lightning rod” that polarized the discussion.
As CFO.com has reported, the committee’s work has become a contentious subject. At the penultimate meeting of the committee, member James “Drew” Connolly complained vigorously about opposition to the committee’s draft, which he charged was part of an orchestrated media effort by a small group of opponents. Committee co-chair Herbert Wander, a partner at Katten Muchin Zavis Rosenman, also disputed media reports that interpreted statements by SEC chairman Christopher Cox as signaling that Cox himself opposes the committee’s conclusions.
Cox and the other four SEC commissioners must approve the recommendations, but aren’t likely to vote on them until after the commission’s scheduled joint roundtable discussion of 404 with the Public Company Accounting Oversight Board on May 10. That meeting is not confined to small-company issues, although they are likely to account for much of the discussion.