Permanent 404(b) Exemption for Non-Accelerated Filers Passes Major Hurdle
By David Feldman at 6 November, 2009, 2:05 am
Yesterday, the House Financial Services Committee, led by Massachusetts Rep. Barney Frank, approved the Investor Protection Act. An amendment proposed by New Jersey Reps. John Adler and Scott Garrett would create a permanent exemption from Sarbanes-Oxley Act Section 404(b) for so-called non-accelerated filers below $75 million in market capitalization. The amendment was approved 37-32, above the objections of Chairman Frank. The full law passed on a 48-42 vote.
As we know, the most onerous provision of the sweeping SOX Act was the requirement to audit a public company’s internal financial controls pursuant to SOX Section 404(b). All companies would still have to comply with 404(a), requiring management to attest that they have examined the company’s internal financial controls and deem them satisfactory. But the additional audit cost which burdens larger companies currently is a significant expense. The SEC had granted multiple extensions of the time when smaller companies would have to start complying with 404(b), the most recent one delaying implementation until fiscal years ending after June 15, 2010.
There is a long way to go for this to pass the full House and Senate. But commentators believe that while this is a surprising anti-regulatory move, it represents a compromise between the Obama Administration and those who believe that smaller businesses need some relief. It is not clear whehter SEC Chair Mary Schapiro supports this. If it happens, it would provide tremendous relief for companies already burdened by additional costs imposed by SOX. Here’s hoping!
My question is who has the shareholders’ interest in mind here? Does the finance committee understand that part of the problem with our economy is lack of investor confidence. Just because a small company can not generate a higher return over EPS than a larger company doesn’t mean that they shouldn’t be regulated. Exactly how much do these smaller company’s pay to have an audit firm opine on controls? Fee’s are commenserate to size. Is this the best excuse D.C. lobbyist’s can come up with? The only way that the House will see that regulation is beneficial is to take it away. Then the small public businesses will see even less investor activity since their is no regulatory body ensuring that fraud or executive mis-management is monitored. Let’s face it. Audit firms change partners on an engagement every 4 to 5 years but that doesn’t mean that they look at the company differently each year. Especially if it is a strong relationship. Small businesses are not paralyzed by the cost of an internal control review. Small businesses are paralyzed by lack of sales, poor business acumen, lack of board involvement, and stiff government, state and local taxes. Let’s put the onus on the real issues instead of creating another way that the investor gets screwed.
Mr. C - I am going to respectfully disagree. Several studies not long after SOX passed made clear that smaller companies were spending a significantly higher percentage of their revenue on compliance than larger companies, so the cost is not commensurate to size. And that was before they were even obligated to audit their internal controls! I think we have seen through Enron, WorldCom, etc., that large companies are just as open to the risks of fraud and mismanagement. It is true that smaller companies have a lower success ratio, and that risk usually is reflected in their stock values. That’s what makes smallcap exciting! The ones that make it see their stocks rise much faster ratably than larger companies. Of course when they don’t do well you take the hit. Thanks for the comment!
David
In a way it could make it easier for the investor- If a company doesn’t hire an auditing firm you will know they are probably garbage just like before but now some scammers won’t have to put up the front- unfortunately there will now be many more.
No auditing =.No investment
The cost of an internal controls audit in conjunction with a financial audit does not need to be burdensome. The latest audit standard, known as AS5, provides the basis for an integrated audit where both the financials and internal controls are reviewed from ‘common’ audit activities. This provision for an integrated audit coupled with inexpensive database applications that capture control documentation, provide testing plans and track control weaknesses is the basis for good business practice at low cost points. “Capital will flow to companies that practice sound corporate governance and risk management.” This could not be more meaningful to a category of business than it is to the small cap category. These are facts and really can not be legislated with any meaningful impact. The market will support good business practices with appropriate cost and related benefits. The solutions are out there.