U.S. audit firms fight SEC rollback threatening $400 million in fees

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Audit firms fight SEC rollback

Highlights

SEC's May proposal would raise the public float exemption for internal controls audits from $700 million to $2 billion, impacting around 1,700 issuers.
Audit firms face an estimated $430 million revenue loss as 27 percent more public companies—those newly exempt—paid $3.8 billion in audit fees last year.
Major opposition from the Big Four and investor groups underscores concerns that reduced auditor attestation could undermine reporting quality and investor confidence.

SEC proposal reshapes internal controls audits

As first reported by Financial Times, U.S. accounting firms are pushing back against a Securities and Exchange Commission plan that would reduce the number of listed companies required to obtain an external audit opinion on internal financial controls. The proposal, published in May, is part of SEC chair Paul Atkins' broader deregulatory agenda aimed at reducing the burden of going public.

Under the plan, companies with a public float below $2 billion would be exempt from the requirement, up from the current $700 million threshold. Businesses that list in the future would also avoid the rule for their first five years on the market, including potentially very large technology groups.

The current framework stems from the 2002 Sarbanes-Oxley Act, introduced after the Enron scandal to strengthen fraud prevention and financial reporting. The SEC estimates the change would exempt a further 27 percent of public companies from auditor attestation, or roughly 1,700 issuers.

Fee pressure and investor concerns across the sector

Data cited in the debate indicate the financial stakes for audit firms are substantial. The U.S. Government Accountability Office found last year that crossing the current threshold for auditor attestation raises median audit fees by 13 percent, while Ideagen Audit Analytics data show newly exempt companies paid $3.8 billion in audit fees last year, implying about $430 million of related revenue for the profession.

Bob Conway, a former audit partner and regulator, says any rollback would hit auditors' earnings directly. Audit firms also argue that savings for companies may be smaller than regulators expect because some internal controls testing would still need to be recreated during a standard financial statement audit.

Opposition to the proposal includes the Big Four, EY, Deloitte, PwC and KPMG, as well as smaller firms and investor groups. The Center for Audit Quality is urging the SEC to weigh the proposal together with other reforms, including a possible shift from quarterly to semiannual reporting, while CAQ vice-president Dennis McGowan says the benefits to controls, reporting quality and investor confidence should be balanced carefully against any cost reductions.

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