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CAQ, investor groups rally to preserve SOX provision

A bill in Congress would raise revenue thresholds, exempting more issuers from internal control assessment requirements.

Please note: This item is from our archives and was published in 2017. It is provided for historical reference. The content may be out of date and links may no longer function.

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The Center for Audit Quality (CAQ) and two investor groups sent a joint letter to the House Financial Services Committee leadership opposing any legislation that would erode Section 404(b) of the Sarbanes-Oxley Act of 2002 (SOX) or would revise the definition of “accelerated filer” in the Securities Exchange Act of 1934.

One provision of the Financial CHOICE Act of 2017, H.R. 10, proposes that issuers with market capitalizations of less than $500 million and depository institutions with assets of less than $1 billion be exempt from SOX Section 404(b), which requires auditors of public company financial statements to attest to, and report on, management’s assessment of its internal controls.

Currently, public companies with market capitalizations of less than $75 million (known as nonaccelerated filers) are exempt from SOX’s requirements for assessment of internal controls over financial reporting.

The CAQ, which is affiliated with the AICPA, joined with the Council of Institutional Investors and the CFA Institute to advocate that SOX Section 404(b) protections be maintained.

The letter cited academic research indicating that the cost of capital for companies that voluntarily comply with Section 404(b) is lower than the cost of capital for companies that do not comply with the rule. Instead, the letter says, investor confidence and the quality of public company financial reporting could decrease if the threshold is raised.

Surveys conducted on behalf of the CAQ cited in the letter indicate that 74% of certified financial advisers and 85% of public company CFOs support investor protectionprovisions in SOX. According to the surveys, 82% of ­financial advisers and 79% of CFOs said SOX has improved the reliability of financial information.