The SEC study, required by Section 989G(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, examined existing studies and included a call for public comment.
Following are the summary conclusions reached by the SEC staff as cited in their study:
1. The costs of Section 404(b) have declined since the Commission first implemented the requirements of Section 404, particularly in response to the 2007 reforms;
2. Investors generally view the auditor‘s attestation on ICFR as beneficial;
3. Financial reporting is more reliable when the auditor is involved with ICFR assessments; and
4. There is not conclusive evidence linking the requirements of Section 404(b) to listing decisions of the studied range of issuers.
Based on the information studied, the SEC staff makes two recommendations:
1. Maintain existing investor protections of Section 404(b) for accelerated filers, which have been in place since 2004 for domestic issuers and 2007 for foreign private issuers
The Staff believes that the existing investor protections for accelerated
filers to comply with the auditor attestation provisions of Section 404(b)
should be maintained (i.e., no new exemptions). There is strong evidence that
the auditor‘s role in auditing the effectiveness of ICFR improves the
reliability of internal control disclosures and financial reporting overall and
is useful to investors. The Staff did not find any specific evidence that such
potential savings would justify the loss of investor protections and benefits to
issuers subject to the study, given the auditor‘s obligations to perform
procedures to evaluate internal controls even when the auditor is not performing
an integrated audit. Also, while the research regarding the reasons for listing
decisions is inconclusive, the evidence does not suggest that granting an
exemption to issuers that would expect to have $75-$250 million in public float
following an IPO would, by itself, encourage companies in the United States or
abroad to list their IPOs in the United States. The Staff acknowledges that the
reasons a company may choose to undertake an IPO are varied and complex. The
reasons are often specific to the company, with each company making the decision
as to whether and where to go public based on its own situation and the market
factors present at the time. The costs associated with conducting an IPO and
becoming a public company no doubt factor into the decisions and may be
particularly challenging for smaller companies. The Staff appreciates that the
costs and benefits of the regulatory actions that the Commission takes – and
does not take – certainly can impact these decisions. At Chairman Schapiro‘s
request, the Staff is taking a fresh look at several of the Commission‘s rules,
beyond those related to Section 404(b), to develop ideas for the Commission
about ways to reduce regulatory burdens on small business capital formation in a
manner consistent with investor protection. However, the Dodd-Frank Act already
exempted approximately 60% of reporting issuers from Section 404(b), and the
Staff does not recommend further extending this exemption.
2. Encourage activities that have potential to further improve both effectiveness and efficiency of Section 404(b) implementation
The Staff recommends that the PCAOB monitor its inspection results and consider publishing observations, beyond the observations previously published in September 2009, on the performance of audits conducted in accordance with AS 5. These observations could assist auditors in performing top-down, risk based audits of ICFR. These communications could include the lessons that can be learned from internal control deficiencies identified through PCAOB inspections.
The Staff is observing COSO‘s project to review and update its internal control framework, which is the most common framework used by management and the
auditor alike in performing assessments of ICFR. The Staff believes that this project can contribute to effective and efficient audits by providing management and auditors with improved internal control guidance that reflects today‘s operating and regulatory environment and by allowing constituent groups to share information on improvements that can be made that enhance the ability to design, implement, and assess internal controls.
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