A professor at the University of Pennsylvania’s Wharton School is warning that the Securities and Exchange Commission’s proposal to exempt smaller companies from having to comply with a key provision of the Sarbanes Oxley Act (SOX) could do more harm than good.
The SEC proposed in May to exempt relatively small firms—those with revenues less than $100 million—from independent audits to verify their internal controls. The objective is to help small companies reduce the cost of going public and to increase the number of publicly traded companies. Still, this exemption could also help management to conceal fraud and lead to more firms restating their accounts.
This would erode more shareholder value than the combined savings in audit costs, according to research by Wharton accounting professor Daniel Taylor. Taylor’s co-authors are Stanford’s Mary Barth, Wayne Landsman from the University of North Carolina and Joseph Schroeder of Indiana University.
“Suppose there’s a marginal company that wouldn’t have gone public when the audit was required. But now that the audit isn’t required, they’re willing to go public. Is that really the type of company that you want to be investing in?” asked Taylor during a recent interview. “So, there is this trade-off between number of companies and quality of companies. We can certainly increase the number of companies by sacrificing compliance and oversight. But is that something that we should desire?”