Risk & Compliance

Small Companies May Be Excused from 404

SEC committee votes overwhelmingly that most companies with a market capitalization below $700 million be excused from assessing their internal con...
Stephen TaubDecember 15, 2005

The Securities and Exchange Commission’s Advisory Committee on Smaller Public Companies has recommended to the full SEC that smaller businesses no longer be required to comply with the Section 404 provisions of Sarbanes-Oxley.

The advisory committee voted 18 to 1 that most companies with a market capitalization below $700 million be excused from assessing their internal controls over financial reporting and from having their auditors certify those controls. The committee also recommended that most companies with a market cap below $100 million be exempted from Sarbanes-Oxley entirely; the current threshold is $75 million.

The recommendations would affect 80 percent of all publicly traded companies but only 6 percent of the total market capitalization, according to data from the SEC’s Office of Economic Analysis. A number of companies with large revenues but a low market capitalization will still be required to comply with the internal-controls requirements, according to published reports.

Supporters have argued for a few years now that requiring small companies to comply with Section 404 is very costly. “We value internal controls strongly,” James C. Thyen, president and chief executive officer of Kimball International Inc. and co-chairman of the SEC committee, told The New York Times. “We see the goodness in it, but we think there has to be some proportionality in costs versus benefits.”

“It’s easier to say we are better off over-auditing than under-auditing,” Janet Dolan, chief executive officer of Tennant Co. and an advisory committee member, told the Associated Press. “However, over-auditing comes at a price, and when that occurs on a large scale across all of our capital markets, the cost to our economy is huge.”

The lone dissenting voter — Kurt Schacht, the executive director of the CFA Centre for Financial Market Integrity — told the Times, “It is clear that we need to do something for small companies, but giving them a pass on any verification and oversight of internal controls will come back to haunt us.”

The commission also announced that beginning in 2007, companies with a market cap over $700 million will have to file their annual report within 60 days instead of the current 75. Companies with a market cap between $75 million and $700 million will not be affected.

The SEC’s Advisory Committee on Smaller Public Companies is next scheduled to meet on January 23, according to the AP, and is expected to issue final, non-binding recommendations in the spring.

Separately, the regulator announced that foreign private issuers will be able to terminate their registration and reporting obligations more easily. A company that had filed reports for the past two years would be able to delist itself if its average daily trading volume was no greater than 5 percent of the average volume of that class of securities and if U.S. residents held no more than 10 percent of its worldwide public float, or if U.S. residents held no more than 5 percent of the worldwide float.