The Center for Audit Quality (CAQ) recently came out in defense of the Sarbanes-Oxley Act (SOX), urging Congress not to exempt the nation's small businesses from the Act's controversial reporting requirements.
In a letter to the Senate Banking Committee, the CAQ urged lawmakers not to exclude smaller firms from SOX's reach, noting that doing so would undermine much-needed investor confidence. "If, as proposed by some members of the House of Representatives, Congress agrees to a permanent waiver for small companies, there may be little independent scrutiny of financial reporting safeguards at an estimated 6,000 small companies," said CAQ Executive Director Cindy Fornelli. "Reporting under Section 404 provides investors with meaningful information regarding a company's internal control over financial reporting (ICFR)."
A bill recently passed by the House included an amendment that would permanently exempt small businesses from SOX Section 404, which already applies to larger companies and requires an external auditor to certify that a business' internal controls are in place and effective. Without an exemption, or yet another delay, small businesses would be forced to comply with the provision starting in June 2010.
The CAQ also noted that, should an exemption be granted, financial statement revisions could increase drastically in a small business sector that already accounts for more than half of all financial restatements. "Recent research noted that restatement rates for companies that disclosed to investors that their ICFR was effective was 46% higher for smaller companies that did not have an independent audit of ICFR as compared to companies that were required to have an independent audit of ICFR," Fornelli added.
Supporters of the amendment, namely author Scott Garrett (R-NJ), argue that small businesses are already facing tremendous financial difficulties and that now isn't the time to further burden them with what some consider SOX's onerous reporting requirements.
In addition to the congressional challenges facing SOX, the Supreme Court hears arguments today regarding the legislation's constitutionality. The ruling in Free Enterprise Fund and Beckstead and Watts, LLP v. Public Company Accounting Oversight Board (PCAOB) will decide whether the SOX-created and Securities and Exchange Commission-monitored PCAOB violates the separation of powers and appointments clauses of the constitution.
Stay tuned to NACM's Credit Real-Time Blog for updates.
Jacob Barron, NACM staff writer