The Center for Audit Quality, along with the Council of Institutional Investors and CFA Institute, have written to the leaders of the House Financial Services Committee urging them to resist efforts to exempt more public companies from compliance with the internal controls auditing provisions of the Sarbanes-Oxley Act.
Potential legislation that is being considered by the committee would exempt even more public companies from compliance with Section 404(b) of the 2002 law requiring an independent audit of a company’s assessment of its internal controls over financial reporting.
Lawmakers sparred last year during the negotiations over the financial reform bill over exempting smaller public companies from the audits. The Dodd-Frank Wall Street Reform and Consumer Protection Act that passed Congress last year ultimately contained a provision mandating that the Securities and Exchange Commission carry out a study on how to reduce the burden of complying with Section 404(b) of SOX for public companies whose market capitalization is between $75 million and $250 million while still maintaining investor protection.
The SEC found in the study, which was released in April, that the existing requirements for issuers with a $75-$250 million public float to comply with the auditor attestation provisions of Section 404(b) should be maintained and that no new exemptions should be granted.
Citing the SEC study, and others, the groups noted that 404(b) compliance costs have continued to decrease while the independent audit of the effectiveness of internal controls over financial reporting improves the reliability of financial reports and are “important to well-functioning capital markets by improving the quality of, and confidence in, the financial reports provided to investors and other stakeholders.”
“Effective internal controls have become more central to the financial statement audit, a fact that has contributed to an increase in overall audit quality in the years since the passage of the Sarbanes-Oxley Act,” said the letter, signed by CAQ executive director Cindy Fornelli, CFA Institute managing director Kurt Schacht and CII general counsel Jeff Mahoney. “The processes associated with attesting to a company's internal control effectiveness have become more integrated into the financial statement audit and, as a result, are more cost-efficient than in the early days of Sarbanes-Oxley Act implementation.”
They noted that the original Public Company Accounting Oversight Board standard that implemented auditor attestation of effective internal controls, known as AS2, was revised in 2007 to allow for greater efficiencies, and the SEC also issued guidance to management on the implementation of Section 404, both of which contributed significant cost savings after the first few years of SOX implementation.
“We believe that all investors should receive equal protections with respect to the effectiveness of internal control over financial reporting by publicly traded companies,” the groups said in the letter, which was addressed to committee chairman Spencer Bachus, R-Ala., and ranking member Barney Frank, D-Mass.
The groups said they understood that efforts to address redundant and unnecessary regulation that provides little value, but added that they believe effective internal controls to be a critical component of the financial statement audit. “The financial statement audit, in turn, continues to be important to well-functioning capital markets by improving the quality of, and confidence in, the financial reports provided to investors and other stakeholders,” they added.
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