SEC Posts Exposure Draft of Advisory Committee

By:  Cydney Posner

The SEC has just posted for public comment the exposure draft produced by the SEC Advisory Committee on Smaller Public Companies. The comment period will expire 30 days after publication in the Federal Register.

As noted in previous emails (pasted below), the recommendations have not been without controversy among committee members, primarily centered around the SOX 404 proposals. Briefly, with respect to SOX 404, the Committee recommended that, unless a special internal control framework is developed for smaller companies, the SEC should:

• provide exemptive relief from SOX 404 requirements to microcap companies with less than $125 million in annual revenue and to smallcap companies with less than $10 million in annual product revenue that have specified enhanced corporate governance controls, including a requirement to maintain effective internal controls;
• provide exemptive relief from external auditor involvement in the SOX 404 process to the following companies, subject to their compliance with the same corporate governance standards:
  • Smallcap companies with less than $250 million in annual revenues but greater than $10 million in annual product revenue; and
  • Microcap companies with between $125 and $250 million in annual revenue; and
• if the SEC concludes that an audit requirement is required, change the requirements for implementing SOX 404’s external auditor requirement to a more cost-effective standard, termed "ASX," providing for an external audit of the design and implementation (as opposed to effectiveness) of internal controls (sometimes referred to as "SOX-lite").

Generally, the bases provided for the dissent of Mr. Jensen from D&T were the significant level of investor opposition, insufficient experience with SOX generally to warrant permanent exemptions, the possible loss of investor confidence in smaller public companies and the confusion that could result from the adoption of a separate auditing standard. He recommended instead an additional deferral of implementation of SOX 404 for smaller public companies, a tailored COSO standard and in-depth studies. Mr. Vehmeyer, from KPMG, argued that the SOX 404 protections should be available to investors in all public companies and contended that Auditing Standard No. 2 should be scaled for smaller companies, although he did not support the a SOX-lite alternative either. Instead he recommended improved implementation guidance. Both accountants were willing to commit the resources of their firms to help in these efforts.

The original dissenter, Mr. Schacht, from the CFA Centre for Financial Market Integrity, contended that checks and balances were important for both large and small public companies, arguing that the focus should be on better implementation of SOX 404, not exemption from it. He also questioned whether the SEC had legal authority for these sweeping exemptions.