Over on Radical Compliance, Matt Kelly recently blogged about the status of the SEC’s proposed changes to the accelerated filer definition – which would have the effect of increasing the number of companies that would not have to comply with SOX 404(b)’s auditor attestation requirement for their reports on ICFR.
The blog notes that Corp Fin Director Bill Hinman’s recent comments at the AICPA suggest that a final rule should reach the SEC soon, and also acknowledges that proponents of the rule change have a point when they talk about the disparate impact of compliance costs on smaller companies:
Smaller companies devote much more of their revenue to audit fees. For example, if you’re a firm with $10 million in annual revenue, for every $1,000 that comes in the door, $29.70 goes back out to your audit firm. For a company with $50 billion in revenue, that amount is just 57 cents.
What’s more, the burden on smaller companies has increased substantially over the past decade. The blog says that in 2007, a hypothetical $10 million firm devoted only $17.73 to audit fees for every $1,000 in revenue. But it goes on to say that the increase isn’t necessarily just attributable to SOX 404 compliance – there have been substantial changes to financial reporting over that same time period.
While acknowledging the cost disparity, the blog also says that smaller companies are more likely to have weaker internal controls than larger firms, and that’s what Section 404(b) audits are meant to address. So, while changes may decrease some companies’ audit costs, they’re also likely to lead to more restatements – the cost of which will be borne by investors.
-John Jenkins, TheCorporateCounsel.net January 8, 2020
