SEC rolls back audit requirements for smaller companies’ internal controls
The Securities and Exchange Commission voted Thursday to exempt smaller public companies with less than $100 million in annual revenue from the requirement for an attestation of their internal control over financial reporting by an outside auditor.
In doing so, the SEC adopted amendments to the definitions of “accelerated filer” and “large accelerated filer” as a way of reducing conpanies’ compliance costs. Outside audits of internal controls are still required under the Sarbanes-Oxley Act of 2002 for larger companies.
Smaller reporting companies with less than $100 million in revenues would still continue to be required to establish and maintain effective internal controls over financial reporting, and their principal executive and financial officers would still be required to continue to certify that, among other things, they are responsible for establishing and maintaining ICFR and have evaluated and reported on the effectiveness of the company’s disclosure controls and procedures. In addition, these smaller companies would still be subject to a financial statement audit by an independent auditor, who is required to consider ICFR in the performance of that audit.
But as a result of the amendments adopted Thursday by the SEC, and unlike larger issuers, these smaller companies will no longer be required to obtain a separate attestation of their ICFR from an outside auditor. The SEC said they would be able to redirect the associated cost savings into growing their businesses. Business development companies will receive similar treatment as a result of the amendments.
The move is part of a larger trend under SEC chairman Jay Clayton to roll back financial and audit regulations. He pointed to a provision of the JOBS Act of 2012 that also relaxed audit requirements for so-called emerging growth companies as setting a precedent for the change.
“The amendments represent an incremental, but meaningful, change that builds on the benefits of the JOBS Act for smaller public companies,” Clayton said in a statement Thursday. “The JOBS Act provided a well-reasoned exemption from the ICFR attestation requirement for emerging growth companies during the first five years after an IPO. These amendments would allow smaller reporting companies that have made it to that five-year point, but have not yet reached $100 million in revenues, to continue to benefit from that exemption as they build their businesses, while still subjecting those companies to important investor protection requirements.”
The final amendments will take effect 30 days after they're published in the Federal Register and will apply to an annual report filing due on or after the effective date.