U.S. SEC plans to scale back audit control requirements for smaller public companies

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SEC eases audit control rules

Highlights

SEC plans to exempt companies with public float below $2 billion and all firms in their first five years post-IPO from Sarbanes-Oxley internal control audit attestation.
Proposal would leave only 1,100 large-cap groups, representing 94 per cent of market value, subject to auditor attestation requirements, according to the SEC.
GAO estimates that newly exempt public companies could save $400 million to $600 million in auditor attestation fees across about 1,600 groups.

Planned changes to internal control audits

As reported by Financial Times, the Securities and Exchange Commission is preparing to narrow the scope of the Sarbanes-Oxley requirement that most companies obtain an auditor’s sign-off on internal controls over financial reporting. The planned rollback would exempt companies with a public float below $2 billion and would also spare all companies from the requirement during their first five years after an initial public offering.

SEC chair Paul Atkins says the aim is to make IPOs more attractive by reducing compliance costs tied to auditor attestation. He argues the requirement adds substantial work and expense, while every company would still remain legally required to maintain strong financial controls and certify that position in shareholder filings.

Congress has already reduced the pool of companies covered by the rule over the years, leaving roughly half of U.S. public companies subject to auditor attestation today. Under the new proposal, only about 1,100 large-cap groups, representing 94 per cent of market value, would remain covered, according to the SEC.

Investor protection and market impact

Data cited in the debate suggests Sarbanes-Oxley has helped improve financial reporting quality since its adoption after Enron’s 2001 collapse. Ideagen Audit Analytics says the number of U.S. public companies restating results fell steadily in the years after the law took effect and has remained low.

At the same time, exempt companies have accounted for between 60 and 80 per cent of annual restatements in recent years, according to the Ideagen data. They are also more likely to disclose material weaknesses in internal controls, while academic studies previously cited by the SEC found auditors often identify weaknesses that management either misses or describes as less severe.

The financial case for easing the rule rests on expected cost savings. A Government Accountability Office report last year estimated auditor attestation accounts for 13 per cent to 19 per cent of total audit fees, implying newly exempt companies could save $400 million to $600 million across roughly 1,600 groups.

Business groups including the U.S. Chamber of Commerce support reducing the burden, and Nasdaq is also in favour. Investor groups and audit firms have opposed the SEC’s proposal, while some business advocates have suggested revising audit guidance instead of exempting such a large share of companies.

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