The Sarbanes-Oxley Act of 2002 (SOX) was brought in following several large-scale collapses in shareholder investments following dubious accounting practices in publicly quoted firms. It imposed rigorous requirements for effective controls over financial reporting – Section 404 of the Act. The cost impact of this has been estimated as $3M for each $1 billion in turnover for large companies with audit company fees doubling for small to medium sized companies (SMEs).
The SEC’s Advisory Committee on Smaller Companies, under pressure from industry bodies, canvassed for comment (see the US Security and Exchange Commission website for details) and, last week, held a public teleconference prior to submitting their final report this coming Sunday. It appears that the recommendation of the Committee, to the satisfaction of the bodies representing SMEs, will be that companies with a market capitalisation of under $128M or with revenues of less than £10M should be exempt from all or part of Section 404. Unsurprisingly, this view did not meet with the support of the auditing firms who noted that, under this proposal, 80% of public firms will not obtain auditor’s reports on their internal accounting controls. One suggestion was that Section 404 should be made less costly for all firms with, perhaps, very small companies receiving a compliance deferral rather than an outright exemption.
The report will be considered by the SEC on May 10th when they will carry out a full review of the second year of the implementation of Section 404. They will also have to consider two further pressures on SOX – the reduction of new listing on US exchanges, particularly those of overseas companies, and the current lawsuit going through the US courts on the legality of much of SOX.
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