Grant Thornton has raised concerns about a plan to exempt smaller companies from a key component of the Sarbanes-Oxley Act reforms, although the change is being welcomed by companies that would avoid the compliance burden.
The SEC has proposed amending its accelerated filer and large accelerated filer definitions in an effort to lower compliance costs for certain lower-revenue companies. Specifically, the planned changes would mean companies with less than $100 mn in revenues no longer have to obtain an attestation of their internal control over financial reporting (ICFR) from an independent outside auditor.
To reach this outcome, the proposal would:
- Exclude from the accelerated and large accelerated filer definitions an issuer that is eligible to be a smaller reporting company (SRC) and had revenues of less than $100 mn in the most recent fiscal year. SRCs are companies with annual revenues of less than $100 mn, if they have no public float, or a public float of less than $700 mn
- Increase the transition thresholds for accelerated and large accelerated filers becoming a non-accelerated filer from $50 mn to $60 mn and for exiting large accelerated filer status from $500 mn to $560 mn
- Add a revenue test to the transition thresholds for exiting both accelerated and large accelerated filer status.
However, the amendments would not change other key Sarbanes-Oxley measures such as independent audit committee requirements, CEO and CFO certifications of financial reports or the requirement that companies establish, maintain and assess the effectiveness of their ICFR.
‘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,’ SEC chair Jay Clayton said in a statement announcing the plans.
‘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.’
His sentiments are echoed in several comment letters filed on the proposals by corporate officials. Damian Finio, CFO of Teligent, writes: ‘The certainty and predictability provided by the proposed rule will enable small public companies like ours to prioritize investments in factors that actually determine success or failure in the pharmaceutical industry, such as the science and technology underpinning our company’s potential, expanding our product pipeline.’
In another letter, Christopher Cole, executive vice president and senior regulatory counsel with the Independent Community Bankers of America, writes: ‘In general, we are not concerned that investors might receive less disclosures about material weaknesses in ICFR if the proposal is implemented since non-accelerated filers will remain subject to all the other requirements of accelerated and large accelerated filers including the requirements for establishing, maintaining, and assessing the effectiveness of ICFR and for management to assess internal controls.’
But Grant Thornton has doubts. ‘[W]e believe the auditor attestation on ICFR is an important element of investor protection that promotes accurate ICFR disclosures by management, increases the effectiveness of ICFR and reduces the rate of material misstatements,’ writes Bert Fox, national managing partner of professional standards at the audit firm.
He adds: ‘We believe the proposal would reduce the level of protection afforded to investors in the impacted issuers that would no longer be required to obtain an auditor attestation on ICFR. Accordingly, we do not support the proposed amendments.’
Smaller companies often have limited access to resources such as accounting employees and IT systems, which could increase the risk that they have ineffective ICFR, Fox says. He points to figures in the SEC proposal indicating that between 2014 and 2018, 40.1 percent of non-accelerated filers on average reported ineffective ICFR, compared to 8.8 percent and 4.1 percent of accelerated and large accelerated filers.
‘Further, we believe the auditor attestation on ICFR facilitates the identification and disclosure of material weaknesses by promoting increased management accountability, as well as potentially exposing management to additional expertise regarding methodologies to evaluate the effectiveness of ICFR,’ Fox writes. ‘Auditor involvement may also lead to more timely identification of deficiencies and significant deficiencies, thus reducing the likelihood of a future material weakness.’
