Advisory Committee on Small and Emerging Companies to discuss internal control audits

The SEC’s Advisory Committee on Small and Emerging Companies is scheduled to discuss the requirement for auditors to attest to management’s internal controls over financial reporting during a Sept. 13, 2017 meeting in Washington.

William Newell, CEO of Sutro Biopharma Inc., and Leonard Combs, chief auditor for PricewaterhouseCoopers LLP, are scheduled to give presentations about Section 404(b). The panel advises the SEC about issues that involve privately held businesses and small public companies with less than $250 million in stock market value.

Smaller public companies have complained about the cost of the auditor attestation requirements from Section 404(b) of the Sarbanes-Oxley Act of 2002, and the advisory panel previously sought a wider scope for the exemption as part of an SEC plan to increase the number of small public companies eligible for other regulatory breaks.

The committee has asked the SEC for the past several years to exempt companies of up to $250 million in stock market value from complying with Section 404(b). The internal control requirements were included in Sarbanes-Oxley because they were viewed as a measure to prevent a recurrence of the accounting scandals that bankrupted companies like Enron and WorldCom.

Currently, companies with market values of less than $75 million are exempt.

At the panel’s July 2016 meeting, an SEC staffer explained why the market regulator did not want to propose exempting more companies in its proposed rule in Release No. 33-10107, Amendments to Smaller Reporting Company Definition. Some advisory committee members were disappointed that a broader exemption was not in the proposal. The SEC plans to finalize the proposed changes to the regulatory definition of a small company in 2018.

The staffer said the agency’s findings in its 2011 study, Study and Recommendations on Section 404(b) of the Sarbanes-Oxley Act of 2002 for Issuers With Public Float Between $75 and $250 Million, revealed that public companies that are subject to the requirements of Section 404(b) had fewer restatements of their financial results.

The panel is also scheduled to discuss whether changes should be made to Rule 701 of the Securities Act of 1933, which lets small private companies offer their securities as part of compensation agreements with officers, employees and directors without having to register the securities with the SEC if they do not pass the $5 million threshold for the aggregate sales or issuances of securities to employees and other persons within a 12-month period.

Above the threshold Rule 701 is triggered, and companies are required to provide financial statements following the same requirements applicable to exempt offerings under Regulation A, according to a July 2017 memo by Ernst & Young LLP.

The meeting is scheduled as the last one for the panel’s current members, whose terms end on Sept. 24. The advisory committee plans to vote on issuing a final report to the SEC.