The Center for Audit Quality and the Council of Institutional Investors are protesting two proposed amendments to the financial regulatory reform bill that would exempt smaller public companies from compliance with Sarbanes-Oxley Section 404(b) audits of their internal controls.

The two organizations have written to the Democratic and Republican leaders of the Senate and the Senate Banking Committee to protest the two proposed amendments, introduced by Sen. David Vitter, R-La., and Kay Bailey Hutchison, R-Texas. The version of the financial reform legislation passed by the House last December already includes such an exemption (see Critics Assail Small Co. 404 Exemption).

“We dispute the suggestion that Section 404(b) compliance can be eased without placing investors in smaller public companies at a distinct disadvantage to investors in larger public companies,” wrote CAQ executive director Cindy Fornelli and Council for Institutional Investors general counsel Jeff Mahoney in their letter. “Investor confidence in financial reports of public companies — large and small — is of tremendous importance to the strength and stability of our capital markets. We hope you will not allow that confidence to be eroded by the adoption of either amendment.”

The Senate voted Thursday afternoon to invoke cloture on the financial reform bill and end debate on the legislation within 30 hours, even though hundreds of amendments still await a vote. The two amendments regarding the Sarbanes-Oxley 404(b) exemption thus may not receive a vote by the Senate and the matter would ultimately then be resolved in a House-Senate conference committee.

The House version of the financial regulatory reform bill contains the so-called Garrett-Adler amendment, which would exempt public companies with market capitalizations below $75 million from Section 404(b), the provision of the Sarbanes-Oxley Act that requires an independent audit report of a public company’s assessment of its internal controls. The Securities and Exchange Commission has repeatedly delayed the requirement for small issuers to have outside audits of their internal controls because of cost concerns. Last October, however, the SEC said the requirement would take effect in nine months’ time.

The Vitter amendment to the Senate bill would permanently waive compliance for non-accelerated filers (companies with market capitalization of less than $75 million), while the Hutchison amendment would go even further by extending the exemption to companies with market capitalization of $150 million, “thereby rolling back existing internal controls requirements for companies that are already in compliance,” according to Fornelli and Mahoney.

Both amendments also call for a study to determine how the SEC could reduce the burden of complying with Section 404(b) for companies with market capitalization of up to $250 million (in the Vitter amendment) or up to $700 million (in the Hutchison amendment), “while maintaining investor protections for such companies.” Fornelli and Mahoney pointed out that the SEC has already conducted such a study, mandated by Congress, which found that Section 404 provides benefits that are valuable regardless of a public company’s size

“Reporting requirement reforms, including the Public Company Accounting Oversight Board’s adoption of Audit Standard No. 5 and the SEC’s management guidance, are reflective of the real-world lessons learned since enactment of SOX. The result has been a decline in compliance costs of approximately 30 percent,” wrote Fornelli and Mahoney.

Several other proposed amendments to the financial reform bill that could affect accountants also have not received a vote in the Senate yet. Those include another amendment that raised concern from the CAQ and the Council of Institutional Investors. The amendment, introduced by Sherrod Brown, D-Ohio, aims to limit the balance-sheet leverage ratios at financial institutions, but also contains language that would dictate some accounting standards (see Accounting Groups Object to Brown Amendment).

Another amendment, from Arlen Specter, D-Penn., would expand the aiding and abetting standards for liability in securities class-action lawsuits, allowing any person who “knowingly provides substantial assistance” to another who violates the securities laws to also be sued. That amendment has not yet been voted on either, but Specter nevertheless joined most of his Democratic colleagues on Thursday afternoon in voting to end debate on the financial reform bill.

The financial reform bill passed Thursday evening without votes on these measures (see Senate Passes Financial Reform Bill).

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