Risk & Compliance

Snow: SEC Should Decide on 404

Asked about legislation that would roll back portions of the controversial provision and exempt many companies from its requirements, the Treasury ...
Ronald Fink and Tim ReasonMay 19, 2006

Treasury Secretary John Snow has apparently aligned the Bush Administration behind the Securities and Exchange Commission and its chairman, Christopher Cox, in the ongoing debate over Section 404 of the Sarbanes-Oxley Act.

Asked at the Bond Market Association’s annual meeting on Friday about efforts by congressional Republicans to roll back portions of the controversial provision and exempt many companies from its requirements, Snow replied, “The Administration hasn’t taken a stand.”

However, he continued, “Our view is that the SEC is in the best position to make those determinations.”

On Wednesday, a group of U.S. senators and representatives introduced a bill that would exempt small companies from compliance with Section 404, which governs internal controls over financial reporting.

Under the bill, a company could opt out of the requirement to assess its internal controls and have its auditor attest to that assessment, provided the company had a total market capitalization under $700 million, total product revenues under $125 million, or fewer than 1,500 shareholders. A company could also opt out if it had been a public issuer for less than a year or had never been required to file an annual report.

In an announcement later that day, the SEC appeared to reject both the legislation and the recommendations of the commission’s own Advisory Committee on Smaller Public Companies. On April 23, the advisory committee had stated that certain microcap and small-cap companies should be exempted from 404 “unless and until” guidance tailored to the needs of smaller issuers is generated. “Ultimately all public companies will be required to comply with the internal control reporting requirements of Section 404,” the SEC said in its announcement.

“I understand the sentiments that lie behind the legislation,” said Snow on Friday, referring to the Republican bill to roll back 404. But, in an apparent echo of Cox’s repeated assertions, he added, “The important thing is that the cost of Sarbanes-Oxley and Section 404 come down over time.”

At a roundtable on May 10, Cox and William Gradison, acting chairman of the Public Company Accounting Oversight Board, also noted repeatedly that lowering the cost of Sarbanes-Oxley is one of their goals.