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SEC Releases Special Study On Sarbox 404(b) For Smaller Public Co's

Apr 22nd 2011
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Earlier today, the SEC released a special study on implementation of Sarbanes-Oxley Section 404 (b) – the auditor’s report on internal control over financial reporting – with respect to smaller public companies (specifically, accelerated filers with market cap between $75 million and $250 million).

The SEC study, required by Section 989G(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, examined existing studies and included a call for public comment.


Following are the summary conclusions reached by the SEC staff as cited in their study:
1. The costs of Section 404(b) have declined since the Commission first implemented the requirements of Section 404, particularly in response to the 2007 reforms;
2. Investors generally view the auditor‘s attestation on ICFR as beneficial;
3. Financial reporting is more reliable when the auditor is involved with ICFR assessments; and
4. There is not conclusive evidence linking the requirements of Section 404(b) to listing decisions of the studied range of issuers.


Based on the information studied, the SEC staff makes two recommendations:

1. Maintain existing investor protections of Section 404(b) for accelerated filers, which have been in place since 2004 for domestic issuers and 2007 for foreign private issuers. [Additional highlights relating to this recommendation can be found here.]

2. Encourage activities that have potential to further improve both effectiveness and efficiency of Section 404(b) implementation... [including] "that the PCAOB monitor its inspection results and consider publishing observations, beyond the observations previously published in September 2009, on the performance of audits conducted in accordance with AS 5." [Additionally], "The [SEC] Staff is observing COSO‘s project to review and update its internal control framework, which is the most common framework used by management and the auditor alike in performing assessments of ICFR [Internal Control over Financial Reporting]. The Staff believes that this project can contribute to effective and efficient audits by providing management and auditors with improved internal control guidance that reflects today‘s operating and regulatory environment and by allowing constituent groups to share information on improvements that can be made that enhance the ability to design, implement, and assess internal controls."



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