Compliance Week Quotes Andy Burczyk on SOX 404 Decision

Small Cos. Escape SOX 404, Not Audit Scrutiny  
By Tammy Whitehouse

The smallest of public companies may have won their long-fought battle to escape an audit of internal controls-but that doesn't mean they are free from scrutiny.

The Dodd-Frank Wall Street Reform and Consumer Protection Act gave small public companies (those with a market capitalization below $75 million) a permanent exemption from the Sarbanes-Oxley Section 404(b) requirement to obtain an audit of internal controls over financial reporting. The audit requirement was due to take effect for fiscal years ending on or after June 15, following numerous delays granted by the Securities and Exchange Commission as larger companies and regulators worked their way through monumental implementation issues.

The legislation also requires some further study of the costs and benefits related to SOX compliance. The SEC is required to report to Congress within nine months how to "reduce the burden" of the audit of internal control over financial reporting even further for companies in the market cap range of $75 million to $250 million. Specifically, Congress wants to know if companies in that space would be more inclined to list their initial public offerings on U.S. exchanges if the audit requirements were either reduced or removed entirely.

The Dodd-Frank bill also tasks the Government Accountability Office to study how the 404(b) exemption will impact restatements, cost of capital, and investor confidence. Congress is looking for some further guidance on the costs and benefits of voluntary compliance with the audit of internal controls and whether exempted companies should be required to disclose to investors that they are not providing a 404(b) audit report. The GAO has a three-year timeframe to work on that study.

Andrew Burczyk, regional attest practice leader with audit firm Mayer Hoffman McCann, says the exemption improves relations between audit firms and their smaller public company clients. "The perceived value versus the cost of implementing (the internal control audit) was nebulous at best," he says. "As a result, it wasn't a service we really felt great about providing to our clients."

Burczyk says he expects, whether consciously or not, some smaller companies will ease up on controls now that they are free of the audit requirement. "Having less focus on controls by human nature is going to lead to less time spent on it and probably, as a result, weaker control environments," he says. "Is it going to be dramatic? No. It's going to be incremental."

To read the complete article on Compliance Week's website, please click here.