February 14, 2017
MBAF's Adam Ingles discusses the potential overhaul of the Sarbanes-Oxley auditor rule with the Wall Street Journal.
President Donald Trump wants to dismantle the Dodd-Frank regulatory overhaul put in place after the financial crisis. Many companies don’t want him to stop there—they are targeting a long-contested provision of the Sarbanes-Oxley Act, passed in the wake of the dot.com bust.
Business groups want to soften a Sarbanes-Oxley rule that requires companies to have auditors weigh in on their “internal controls”—the policies and procedures intended to prevent errors or fraud on their financial statements.
Sarbanes-Oxley requires companies to evaluate whether these controls are effective and to have their auditor pass judgment on that assessment. Shareholder advocates say the rule, known as Section 404(b), helps ensure companies are giving accurate numbers to investors. Groups like the U.S. Chamber of Commerce say the rule is too costly and burdensome for small companies.
The fight over the rule has been simmering for years, but both sides say President Trump’s antiregulatory push has given it renewed intensity. This “changed the mind-set,” said John Berlau, a senior fellow at the Competitive Enterprise Institute, who is among those pushing to revamp the rule. “I think with the general sort of regulatory skepticism that goes along with the new administration, you’re seeing more of a direct focus on 404.”
The rule’s supporters are girding to defend it. For companies, “it creates a greater sense of accountability that shouldn’t go away,” said Sandra Peters, head of financial reporting policy for the CFA Institute, which represents chartered financial analysts who work with individual investors.
And change may be coming fast: A coming version of the Financial Choice Act, Republicans’ proposed replacement for Dodd-Frank, would apparently relax the Sarbanes-Oxley provision by exempting even more companies from it than had been planned under previous versions of this legislation.
The most recent version of the legislation called for raising the threshold under which companies are exempt from the rule to a market capitalization of $250 million. A coming version of the legislation will raise that to $500 million, according to a memo from House Financial Services Committee Chairman Jeb Hensarling (R., Texas) reviewed by The Wall Street Journal. As things now stand, the current threshold, imposed by Dodd-Frank, is a public float under $75 million.
“We feel that dialing back some of those provisions would help spur economic activity and create jobs,” said Adam Ingles, head of regulatory risk solutions at MBAF, a Miami-based accounting and consulting firm.
Supporters of the rule say it is worth the trouble and should apply to companies of all sizes. A 2013 Government Accountability Office report found companies exempt from it restate their financial statements more often than those that must comply with it.
When larger companies began reviewing internal controls more than a decade ago, restatements initially soared, as companies found and fixed flaws in their controls, but subsequently, restatements declined. In 2015, 663 companies restated their financial statements, the fewest since 2002, according to consulting firm Audit Analytics.
“We don’t need people investing in small companies that take off and then die,” said Lynn Turner, a former Securities and Exchange Commission chief accountant.
But opponents of the internal-control rule argue that audits cost small companies money they just can’t spare. They also maintain the compliance requirement deters companies from going public. “Our investors have told us time and again we would much rather you be spending money on research,” said Charles Crain, director of tax and financial-services policy for the Biotechnology Innovation Organization, an industry group lobbying for changes in the rule.
Regulators and legislators have tried to address small companies’ concerns in the past. Besides Dodd-Frank’s exemption of the tiniest companies, regulators made their rules for conducting auditor reviews “scalable” for small companies in 2007. The 2012 JOBS Act further exempted new “emerging growth companies” from following the rule.
BIO supports an approach, also part of the proposed Choice Act, that would extend the exemption from auditor review for emerging-growth companies for an additional five years, to a total of 10 years, if they have annual revenue below $50 million. That would help small biotech companies with no revenue as they go through the long development period for new drugs, Mr. Crain said.
“Our companies need to go public, it is vital to their survival, and once they get there we want to make sure everything goes easily for them,” he said.
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