Question

Related to SOX, the SEC has decided to exempt smaller public companies with less than $100 million in annual revenue from the requirement for an attestation of their internal control over financial reporting by an outside auditor. Do you think this is a good or bad modification of the SOX requirements?

Answer 1

The financial statements audit involves assessments required by an internal controls audit. Auditors being compensated for internal controls audits may have a financial incentive to increase certain assessments under the financial statement audit for these newly exempt issuers. The cost savings resulting from the rule is linked to increased costs associated with the financial statement audit, and management’s time and attention to be involved in connection with the financial statement audit.

It has been also emphasized that internal controls are crucial for the financial statements, auditor's views are more important than the audit itself. It is found that companies exempt from controls audits had more re-statements, while companies that had controls audits had higher valuation premiums and lower cost of debt. The cost of the attestation audit has declined over time, particularly incremental costs as part of an integrated audit.

Therefore, this rule is a balanced one and withing the radar of equality to both sides of a coin. It does not achieve all that it would have liked it to accomplish, but it is also one step forward in the efforts to ensure that the investors keep the information they need and the opportunities they want to participate in the growth era of potential companies.