The Securities and Exchange Commission stopped well short of proposing exemptions from the Sarbanes-Oxley Act’s internal control provisions that many small companies had loudly lobbied for at the panel’s Wednesday meeting.Under the guidance proposed by the SEC, executives would evaluate the design of only those financial controls that might carry the risk of having a material impact on financial statements.
"With this guidance, management will be able to scale and tailor their evaluation procedures to fit their facts and circumstances and investors will benefit from reduced compliance costs,” said SEC Chairman Christopher Cox. “While the guidance is intended to help public companies of all sizes, smaller companies should particularly benefit from its scalability and flexibility."
The five-panel commission voted unanimously to request public comment on the new guidance focusing on three areas:
- Business evaluation of internal control over financial reporting;
- Amendments that would make it clear that a company choosing to perform an evaluation of internal control in accordance with the interpretive guidance would satisfy the annual evaluation required by those rules; and,
- Amendments that clarify the auditor's reporting requirement under Section 404 of SOX.
The regulators said that the proposed guidance was meant to provide small companies with a tool to restrict auditors from engaging in what executives have viewed as expensive and unnecessary audits of financial controls that had minimum impact on financial statements. The Public Company Accounting Oversight Board is set to propose a companion new auditing standard on Dec. 19."We have worked hard to ensure that the proposed guidance will not disrupt best practices already in place, or that may be evolving, while at the same time ensuring that it would be scalable to companies of all sizes," said SEC Chief Accountant Conrad Hewitt. Hewitt stressed that the changes were made while keeping a balance between both management's evaluation process and the audit process in mind.
The full text of the proposed interpretive guidance and rules are available at
Seperately, the SEC proposed rules that would:
- Make it easier for foreign companies to withdraw their securities from American markets;
- Increase the financial qualifications for investors in hedge funds, to a net worth of $2.5 million, from the current standard of $1 million; and,
- Make it less costly for banks to offer brokerage services.
The panel also adopted a rule that would save corporations the expense of mailing financial reports and proxy statements by providing them to investors online. Investors will still be able to receive paper copies of proxies and other material through the mail if requested.
