Comment letters from accounting firms oppose widening Sarbanes-Oxley Section 404(b) exemption

In comment letters to the SEC, two audit firms criticized an effort to make more companies eligible for an exemption from the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002.

The two firms were joined in their opposition by the Center for Audit Quality (CAQ) and the Council of Institutional Investors (CII), who argued in a joint letter that a wider exemption would hurt investors. The CAQ is an affiliate of the AICPA. The CII is a trade group representing pension funds.

The August 30, 2016, letters come on the last day of the comment period for the SEC’s proposal in Release No. 33-10107, Amendments to Smaller Reporting Company Definition. The proposed rules would raise the threshold to qualify as a “smaller reporting company” to $250 million in stock market value from $75 million. The higher limit will let more companies to take advantage of lighter SEC reporting and disclosure requirements of Regulation S-X and Regulation S-K.

As proposed, Release No. 33-10107 would result in some issuers meeting the new definition of a smaller reporting company, while still being classified as “accelerated filers.” Accelerated filers are companies with a market value between $75 million and $700 million and are subject to Section 404(b) audits of their internal controls over financial reporting (ICFR).

Several industry commenters, including the New York Stock Exchange, want the SEC to include an equivalent increase in the public float threshold for an accelerated filer, thus freeing a wider group of issuers from the internal control audits. The SEC did not include such a change in its proposal in Release No. 33-10107.

The CAQ and the CII oppose making the Section 404(b) exemption available to more companies. An amendment that weakens the audit requirements “would substantially impact the quality of financial reporting by public companies to the detriment of investors and our capital markets more generally,” the CAQ and CII wrote.

“We believe Section 404(b) continues to be significant as it provides investors with reasonable assurance from the independent auditor that a company maintained effective internal control over financial reporting,” the trade groups wrote. “This assurance is an important driver of confidence in the integrity of financial statements and in the fairness of our capital markets.”

One accounting firm’s comment letter cited a 2011 SEC staff report, Study and Recommendations on Section 404(b) of the Sarbanes-Oxley Act of 2002 for Issuers With Public Float Between $75 and $250 Million, which detailed “strong evidence” that auditors’ work under Section 404(b) improves the reliability of a company’s internal control disclosures and helps investors. The report also found no evidence that the lower costs from exempting more companies from the requirements would justify the loss of investor protection, the firm said.

“We do not believe it would be prudent to roll back existing internal control reporting requirements for a population of issuers that are currently complying with 404(b),” the firm wrote. “We do support ongoing dialogue among the SEC, PCAOB, issuers, and auditors regarding continuous improvement efforts with respect to management’s assessment and the auditor’s attestation of ICFR.”

The opposition to the wider exemption aligns with the views of the SEC staff, which in Release No. 33-10107 also cited the 2011 study to defend the decision to maintain the current accelerated filer threshold.

Industry commenters say that creating an overlap between smaller reporting companies and accelerated filers would be confusing and counterproductive. Seneca Foods Corp., a publicly traded canned and bottled food producer, said in an August 2 comment letter that the disclosure benefits under the current proposal “will have a minimal effect to our annual compliance costs.”

“Therefore, we believe that result of the change does not meet the SEC's objective to reduce compliance costs for small registrants,” the company added. “The true compliance savings are connected to obtaining relief from the provisions of SOX 404(b), auditor's internal control attestation. Our estimate is that we would be able to obtain a 35 percent reduction to our compliance costs if these proposed rules applied to the accelerated filer requirements.”

For more information on this topic, or to learn how Baker Tilly accounting and assurance specialists can help, contact our team.


We have partnered with Thomson Reuters to issue our monthly SEC Accounting Update. Please feel free to contact Baker Tilly at accounting@bakertilly.com if you have any questions related to these articles or Baker Tilly's Accounting and Assurance Services. © 2016 Thomson Reuters/Tax & Accounting. All Rights Reserved.