The SEC Recommends No New SOX 404(b) Exemptions for Accelerated Filers

On Friday the Securities and Exchange Commission released its latest Dodd-Frank Act-mandated study which looks at how the burdens of Sarbanes-Oxley Section 404(b) compliance (the auditor attestation requirement) might be reduced for companies with market capitalizations of between $75 million and $250 million while still maintaining investor protections, as well as at whether a reduction in or exemption from Section 404(b) compliance would encourage companies to list their initial public offerings in the United States.

As part of its analysis the Commission reviewed findings from its 2009 Section 404 study, actions that have already been taken to reduce the burdens of Section 404 compliance (previously discussed here), academic and other research, and comment letters received in response to a request for public comment made in conjunction with the current study. The Commission concluded that:

• the overall cost of Section 404(b) compliance has declined;

• investors view Section 404(b) auditor attestations as beneficial;

• financial reporting is more reliable when auditors are involved; and

• there is no conclusive evidence that links the requirements of Section 404(b) compliance with the listing choices of companies undertaking their initial public offerings.

Based on these findings the Commission makes two recommendations, that:

• existing Section 404(b) requirements for issuers with market capitalizations of between $75 million and $250 million remain in place; and

• activities that improve the effectiveness and efficiency of Section 404(b) implementation be encouraged, such as the publication of PCAOB inspection observations and COSO’s review and update of its internal control framework.

So, unless Congress enacts another exemption, it looks like accelerated filers with market capitalizations of between $75 million and $250 million will remain subject to Sarbanes-Oxley Section 404(b)’s auditor attestation requirement.

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There wasn’t too much in the way of new information in the Section 404(b) study, but there were a few interesting charts and data points:

In 2009, 9,092 unique issuers filed annual reports with the Commission on Forms 10-K or 20-F (excluding investment companies, issuers of asset backed securities, certain Canadian issuers and financial institutions, among other miscellaneous categories of filers). These filers are broken down as follows:

There was a significant difference between the mean and median audit fees incurred by accelerated and non-accelerated filers in 2009:

Source: Section 404(b) Study Fig. 3, page 37

More than 80% of all restatements that occurred in 2009 were caused by the misapplication of GAAP accounting standards, but issuers that were subject to Section 404(b) had lower restatement rates.

Source: Section 404(b) Study Fig. 7, page 40

Finally, the U.S. markets’ share of world-wide IPOs raising less than $250 million has declined dramatically over the past decade.

New listing with proceeds of less than $50 million

Source: Section 404(b) Study Fig. 12, page 47

New listing with proceeds of less than $75 million

Source: Section 404(b) Study Fig. 11, page 47

New listing with proceeds of $75 million to $250 million

Source: Section 404(b) Study Fig. 10, page 45

New listing with proceeds of $50 million to $500 million

Source: Section 404(b) Study Fig. 13, page 48