Mid-size Companies Should Comply with Sarbanes-Oxley

Accountants at the Securities and Exchange Commission (SEC) are recommending that medium-size public companies should not be exempted from a key auditing provision in the 2002 Sarbanes-Oxley Act, saying the benefits to investors outweigh the cost.

In a new study by the Office of the Chief Accountant at the Securities and Exchange Commission, staff determined that the costs of complying with so-called “Section 404(b)” of Sarbanes-Oxley have declined in recent years.

The study also found no evidence to suggest any changes to Section 404(b), which requires auditors to affirm the internal controls over financial reporting at public companies, would bolster the U.S. market for initial public offerings.

Section 404 “improves the reliability of internal control disclosures and financial reporting overall and is useful to investors,” the staff wrote. “The staff did not find any specific evidence such potential savings would justify the loss of investor protections and benefits to issuers subject to the study.”

The Dodd-Frank Wall Street Reform law enacted last July had already granted a reprieve to small cap companies under $75 million by giving them an exemption from Section 404(b).

The exemption was included in the law after the SEC had previously granted several extensions to smaller companies to give them more time to comply amid complaints the regulation was too burdensome.

Despite winning the exemption for smaller companies, some in Congress wanted to take it a step further and give larger companies relief as well.

The new study by the SEC, which was required in Dodd-Frank, looked specifically at mid-size companies with a public float of between $75 million and $250 million. Its goal was to examine ways to reduce the compliance burden and determine if anything could be done to encourage these companies to list on U.S. exchanges.

The Center for Audit Quality lauded the findings in a statement Monday, calling it “thoughtful” and saying it was pleased the SEC recommended retaining Section 404(b).