The staff of the office of the chief accountant of the Securities and Exchange Commission published its study on April 22, as required under the Dodd-Frank Act, examining Section 404(b) of the Sarbanes-Oxley Act, which requires public companies' auditors to report on, and attest to, management's assessment of its internal controls.  

The 118-page release concluded that the costs of Section 404(b) declined since they were first implemented, that investors generally consider auditors' attestation on assessments of internal controls to be beneficial, that financial reporting is more reliable when an auditor is involved in such assessments, and finally, that there is inconclusive evidence about whether Section 404(b) requirements are connected to issuers' listing decisions.

The study was intended to advise the Commission on reducing the burden of complying with Section 404(b) for companies with a market capitalization of between $75 and $250 million. Issuers categorized as non-accelerated filers or smaller reporting companies are exempt, under Dodd-Frank.  

The Staff also made two recommendations in its release. The first is that there be no new exemptions for accelerated filers to comply with auditing requirements of internal controls, since potential savings would not justify the loss of investor protections.

The second recommendation is that certain activities that could improve Section 404(b)'s effective implementation should be encouraged. Specifically, the staff recommended that the Public Accounting Oversight Board “monitor its inspection results and consider publishing observations,” and approved of the Committee of Sponsoring Organization's project to review and update its internal control framework, since the 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,” as well as enable constituents to share information on improving  internal controls.

To complete the study, the staff reviewed data on a sample of relevant issuers, existing research on the requirement, as well as comments requested and received on 23 areas of inquiry. The Commission itself has not expressed its view on the study and the recommendations, according to the document.

Topics