The Securities and Exchange Commission has proposed changes that would limit the need to adhere to the Sarbanes-Oxley Act (SOX) requirements to obtain audits of their financial controls over financial reporting (SOX 404) to larger public companies.
The SEC voted yesterday to propose amendments to the accelerated filer and large accelerated filer definitions. The changes could have a big impact on the need for companies to obtain audits of their internal controls over financial reporting (ICFR) under SOX provision 404. Smaller reporting companies with less than $100 million in revenues would not be required to obtain an audit of ICFR from an independent outside auditor. Currently accelerated filers are defined by those with a market capitalization of more than $75 million and are required to comply with SOX 404.
“The proposed amendments would reduce costs for certain lower-revenue companies by more appropriately tailoring the types of companies that are categorized as accelerated and large accelerated filers while maintaining effective investor protections” the SEC said in a statement.
As a result of the proposed amendments, According to the SEC, the proposal would not change other key components of SOX, such as independent audit committee requirements, CEO and CFO certifications of financial reports, or the requirement that companies continue to establish, maintain, and assess the effectiveness of their ICFR.
The proposed amendments would:
- Exclude from the accelerated and large accelerated filer definitions an issuer that is eligible to be an Small Reporting Company (SRC) and had no revenues or annual revenues of less than $100 million in the most recent fiscal year for which audited financial statements are available.
- Increase the transition thresholds for accelerated and large accelerated filers becoming a non-accelerated filer from $50 million to $60 million and for exiting large accelerated filer status from $500 million to $560 million.
- Add a revenue test to the transition thresholds for exiting both accelerated and large accelerated filer status.
“The proposed rules build on the JOBS Act of 2012 and are aimed at a subset of smaller companies where the additional requirement of an ICFR auditor attestation may not be an efficient way of benefiting and protecting investors,” said SEC Chairman Jay Clayton. “Investors in these lower-revenue companies will benefit from more tailored control requirements. Many of these smaller companies—including biotech and health care companies—will be able to redirect the savings into growing their companies by investing in research and human capital.”
The SEC is now fielding public comments on the proposal to ease SOX 404 for the next 60 days and will likely vote on the proposal in late summer or early fall. 