Proposed Legislation Would Exempt Small Companies from Auditor Attestation Requirement

The last-minute Section 404(b) reprieve granted to small companies by the Securities and Exchange Commission (SEC) could become permanent if the House Financial Services Committee has its way.  In November, the committee passed a bill that would permanently exempt non-accelerated filers from the auditor attestation requirement.

That vote followed on the heels of the surprise October decision by the SEC to grant yet another postponement.  It marked the fourth delay for public companies with market caps below $75 million and extended initial reporting requirements to fiscal years ending on or after June 15, 2010.

The impetus for the latest extension was publication of the SEC’s Office of Economic Analysis study on whether additional guidance provided in 2007 reduced the cost of compliance.  Because results were published in October, just three months before the Dec. 15 reporting deadline, the SEC determined it was appropriate to provide small public companies more time to plan for compliance.

The agency also made it clear that this extension would be the last.

“Since there will be no further Commission extensions, it is important for all public companies and their auditors to act with deliberate speed to move toward full Section 404 compliance,” said SEC Chairman Mary L. Schapiro.

However, in November, the House Financial Services Committee approved an amendment to the Investor Protection Act that would permanently exempt non-accelerated filers from the requirement to provide auditor attestation on internal controls over financial reporting.  The amendment, proposed by Scott Garrett (R-NJ) and John Adler (D-NJ), does not impact compliance requirements with other sections of the statute.

According to Adler, the “one size fits all” approach to implementing Section 404 has had a disproportionately negative impact on small and medium sized companies, and a permanent exemption would provide stability and predictability.  He also notes that the current and pending compliance burden has sent many companies to market overseas or dissuaded them from going public in the United States.

“Congress needs to maintain this exemption for small businesses.  These burdensome regulations were never intended to impact America's small and medium-sized businesses this way,” said Adler.  “Small businesses are the backbone of our economic recovery and this necessary reform will help keep and create jobs for hard-working Americans.”

The goal of the amendment is to maintain the high levels of transparency individual investors need to make informed decisions, without damaging the nation’s market competiveness.  Adler says that regulations should take into account the different characteristics and limitations of various sized companies, keeping the largest companies in check while allowing smaller companies to help the nation’s economy grow and create jobs.

The amendment also asks the SEC and Government Accountability Office (GAO) to conduct a study to determine how the SEC can reduce the burden of complying with Section 404(b), while still maintaining investor protections for small public companies.  In the study, the SEC and GAO would also consider whether reducing the compliance burden or a complete exemption for these companies will encourage them go public in the U.S.

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