Sarbanes-Oxley Section 404: Will We See More?

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Appearing at her second Congressional hearing in as many weeks relating to small business capital formation, SEC Division of Corporation Finance Director Meredith Cross testified to the House Financial Services Committee yesterday on various initiatives the SEC is considering to better facilitate small business capital formation, while still adhering to its investor protection mandate. See the link to the hearing webpage, which includes links to all testimony and some related proposed legislation.

I found her prepared remarks on Sarbanes-Oxley Section 404 to be of the most interest, as summarized below. (Please note the disclaimer that appears on the right side of this blog).

Note: I did not listen to the live webcast of the hearing, this summary is based on written testimony and draft legislation; if other bloggers out there live-blogged (or live-tweeted) the hearing, I invite you to post a comment or send me an email with a link to your blog post or twitter handle.).


In her testimony yesterday, SEC’s Cross noted that the Dodd-Frank Act amended Sarbox by exempting non-accelerated filers (i.e. companies with less than $75 million market cap). A footnote in her testimony linked to the SEC’s study, also mandated by the Dodd-Frank Act, as to whether further exemptions or other improvements could be made with respect to the rules pertaining to Sarbox 404, for companies with over $75 million market cap and less than $250 million market cap; that study concluded there should be no further exemptions, and that further study would be given to potential improvements.

She reiterated in her testimony today, in language similar to that used in the SEC’s Sarbox study referenced above, that:
The staff encourages activities that have the potential to further improve both the effectiveness and the efficiency of the evaluation of internal controls, while maintaining important investor protection safeguards. For example, with this objective in mind, the staff continues to work with the PCAOB to monitor inspection results and assess the extent to which publishing observations can be useful.
She added:
The staff is also observing COSO’s (Committee of Sponsoring Organizations of the Treadway Commission) project to review and update its internal control framework, which is the most common framework used by management and auditors alike in performing assessments of internal control over financial reporting.
Read more about the Congressional hearing, some legislative proposals in circulation to increase the availability of exemptions for small co's from Sarbox 404 and related reactions, and the release of a report from the SEC Inspector General earlier this week, here.


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