SEC Study Offers Recommendations Against Additional Section 404(b) Exemptions

Public Companies

By Charles Oshurak

Based upon requirements within Section 989G(b) of the Dodd-Frank Act, in April, the Securities and Exchange Commission’s (SEC) Office of the Chief Accountant issued its results of a study evaluating the impact of Sarbanes-Oxley Act Section 404(b) on issuers holding a public float between $75 million and $250 million. The study’s main objective was to evaluate the burden on the companies in maintaining investor protection through the requirements of Section 404(b). The study also analyzed the possible impact that a complete exemption could have on companies considering their initial public offerings on U.S. versus foreign markets.

The staff based its recommendations on information it gathered during a study on the implementation of Section 404 completed in 2009, as well as a thorough review of other research and public comments. The staff analyzed the overall characteristics of companies with a public float between $75 million and $250 million in terms of their assets and revenues, decentralization of operations, industries, audit fees and their restatement and material weaknesses communication rates.

The staff concluded that companies subject to review within this study differ significantly from the filers that received their permanent exemption from Section 404(b) last summer. This study found that its subject companies had no specific characteristics that would suggest a need to differentiate them, taken as a whole, from accelerated filers who have been subject to Section 404 since 2004.

Additionally, the staff found no significant impact in the amount of U.S. based initial public offerings that would be connected to the implementation of Section 404 requirements.

The study contained the following two suggestions;

  1. While the financial impact on companies due to the implementation of the auditor’s attestation on internal controls over financial reporting has continued to decrease, the reliability of the financial information reporting continues to increase. Thus, the staff believes that the existing requirements for accelerated filers to comply with Section 404(b) should be retained with no additional exemptions being granted.
  2. The PCAOB should considering publishing its inspection results and observations as they relate to the performance of audits conducted in accordance with Auditing Standard No. 5. The staff believes these observations could assist the auditors in performing a risk-based, top-down approach audit.

The SEC has also committed to review the COSO update project that is evaluating the structure of its internal control framework, which is most commonly used by management in its assessment of internal controls. The SEC hopes that these changes will contribute to more efficient and effective internal control environments and, in turn, audits.

For more information, please contact Charles A. Oshurak, Audit Advisory Senior Manager within Schneider Downs' SEC practice.




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