Smaller Public Companies and Sox
Should Smaller Public Companies be Exempted from Complying with SOX Section 404(b)?
ABSTACT
On July 21, 2010 the Dodd-Frank Wall Street Reform and Consumer Protection Act provided the non-accelerated public companies (those with a market capital below $75 million) a permanent exemption from complying with the Sarbanes-Oxley (SOX) Section 404(b). The Section 404(b) would have required these smaller companies to do what larger companies over the $75 million market cap are currently doing; requiring an external auditor to audit their internal controls over financial reporting. However, what may seem like a huge win for the smaller companies who long have complained about the cost out weighing the benefits of complying with the standard, does not appear that way to everyone.
INTRODUCTION
Sarbanes-Oxley (SOX) Act Section’s 404 (a) and (b) were created to help restore the public’s trust in what public companies are reporting in their financial statements, as well as the opinions on the reports that the auditors are providing on the financial statements. SOX 404(a) implies that managements of public companies assess and report on whether their internal controls over financial reporting (ICFR) are effective (United States Securities and Exchange Commission [SEC], 2009); in order to ensure that those requirements in Section 404(a) are being met, public companies are required to have an external auditor attest to management’s assessment over the ICFR (SEC, 2009). While SOX 404(a) is required by all public companies, Section 404(b) was required only by large companies (those with a market cap greater that $75 million). As for the smaller public companies (those $75 million and under), they were granted numerous extensions and were eventually permanently exempted. The main purpose of SOX 404 was to alleviate the growing tension between investors, government agencies, and public companies. While the public trust is continuing to be restored, according
ABSTACT
On July 21, 2010 the Dodd-Frank Wall Street Reform and Consumer Protection Act provided the non-accelerated public companies (those with a market capital below $75 million) a permanent exemption from complying with the Sarbanes-Oxley (SOX) Section 404(b). The Section 404(b) would have required these smaller companies to do what larger companies over the $75 million market cap are currently doing; requiring an external auditor to audit their internal controls over financial reporting. However, what may seem like a huge win for the smaller companies who long have complained about the cost out weighing the benefits of complying with the standard, does not appear that way to everyone.
INTRODUCTION
Sarbanes-Oxley (SOX) Act Section’s 404 (a) and (b) were created to help restore the public’s trust in what public companies are reporting in their financial statements, as well as the opinions on the reports that the auditors are providing on the financial statements. SOX 404(a) implies that managements of public companies assess and report on whether their internal controls over financial reporting (ICFR) are effective (United States Securities and Exchange Commission [SEC], 2009); in order to ensure that those requirements in Section 404(a) are being met, public companies are required to have an external auditor attest to management’s assessment over the ICFR (SEC, 2009). While SOX 404(a) is required by all public companies, Section 404(b) was required only by large companies (those with a market cap greater that $75 million). As for the smaller public companies (those $75 million and under), they were granted numerous extensions and were eventually permanently exempted. The main purpose of SOX 404 was to alleviate the growing tension between investors, government agencies, and public companies. While the public trust is continuing to be restored, according
References: Aguilar, M. (2010, May). Small filers struggle with internal controls over fraud. Compliance Week, 7(76), 33,74. Retrieved from ABI/INFORM Trade & Industry. Dodd-Frank Wall Street Reform and Consumer Protection Act. Conference Report to Accompany H.R. 4173. House of Representative , 111th Cong. 583 (2010). Garrett, S. 2009. Garrett introduces SOX exemption for small businesses, Press release, Oct. 8,2009. Hamilton, J. (2009, June). Section 404 works and is important for small companies, Aguilar feels. SEC Filings Insight,1,4. Retrieved from ABI/INFORM Global. How potential changes in small-company SOX regulations could affect your firm. (2006, February). Accounting Office Management & Administration Report, 06(2), 1,6+. Retrieved from ABI/INFORM Trade & Industry Silverstein, M. (2008, December) Solnik, C. (2010, July). Small companies push to gain permanent exemption from Sarbanes-Oxley requirement Silverstein nts. Long Island Business News. Retrieved from ABI/INFORM Dateline. United States Securities and Exchange Commission, Office of Economic Analysis. (2009). Study of the Sarbanes-Oxley Act of 2002 Section 404 Internal Control over Financial Reporting Requirements Whitehouse, T. (2009, April) Wolkoff, N.L (2005, August). Sarbanes-Oxley Is a Curse for Small-Cap Companies. Wall Street Journal (Eastern Edition), p. A.13. Retrieved from ABI/INFORM Global.