Smaller reporting public companies (under $75 million in market cap) are no longer subject to the Sarbanes-Oxley Act (“SOX”) Section 404(b) audit requirement now that the Dodd-Frank Wall Street Reform and Consumer Protection Act (“the Act”), previously known as the Financial Reform Bill, became law.
President Obama signed the bill into law today, July 21, 2010, permanently ending the history of numerous Section 404(b) deferments.
Although the Act is a major financial regulatory reform package that addresses a variety of legislation, the SOX Section 404(b) exemption is notable to small public companies and CPA firms alike. Under the new law, smaller reporting companies are permanently exempt from having an independent auditor test and report on the effectiveness of their internal controls over financial reporting
Enacted in July 2002 and heavily reformed in 2007, SOX breaks up Section 404 into two requirements: 404(a) requires company management to assess and report on the effectiveness of internal controls over financial reporting, and 404(b) requires an independent auditor to attest to and report on the effectiveness of those internal controls. The Act only exempts Section 404(b) requirements.
Accelerated filers (public companies with market caps between $75 million and $250 million) may also benefit from the exemption in the future as the Act requires the Securities and Exchange Commission (SEC) to complete a study on how to reduce the Section 404(b) audit compliance burden for mid-market companies. The study will examine whether a reduced burden, or a complete exemption, would encourage companies to list on US stock exchanges.
Section 404(b) is often associated with the anticipation of seemingly high compliance costs. The new permanent exemption comes as welcomed news to public company executives. The Section 404(b) exemption eliminates the anticipated increase in overall audit fees previously slated to be effective in 2010.