The Garrett-Adler amendment to the Sarbanes Oxley Act 2774
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Prepare for the Garrett-Adler amendment to the Sarbanes Oxley Act.%0AThe House Financial Services HFS Committee has voted to amend the Sarbanes-Oxley Act to permanently exempt small public companies companies valued at less than USD75 million from the provisions of Sarbanes-Oxley Section 404b. %0A %0AThe Garrett-Adler amendment, offered by Rep. Scott Garrett R-NJ and Rep. John Adler D-NJ, was approved in the HFS Committee as part of the Investor Protection Act IPA. %0AThe Garrett-Adler amendment that is incorporated in the Investor Protection Act of 2009 exempts all small issuers from 404b and requires the SEC to study how the cost-of-compliance burden for companies with market caps between USD75 million and USD250 million can be reduced. %0AMore than 50% of all publicly traded companies have market capitalizations below USD75 million.%0ALet’s remember Section 404b of the Sarbanes Oxley Act%0ASEC. 404. MANAGEMENT ASSESSMENT OF INTERNAL CONTROLS.%0Aa RULES REQUIRED.%0AThe Commission shall prescribe rules requiring each annual report required by section 13a or 15d of the Securities Exchange Act of 1934 15 U.S.C. 78m or 78od to contain an internal control report, which shall%0A1 state the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting; and%0A2 contain an assessment, as of the end of the most recent fiscal year of the issuer, of the effectiveness of the internal control structure and procedures of the issuer for financial%0Areporting.%0A404b INTERNAL CONTROL EVALUATION AND REPORTING.%0AWith respect to the internal control assessment required by subsection a, each registered public accounting firm that prepares or issues the audit report for the issuer shall attest to, and report on, the assessment made by the management of the issuer. %0AAn attestation made under this subsection shall be made in accordance with standards for attestation engagements issued or adopted by the Board. Any such attestation shall not be the subject of a separate engagement.%0AIs it a good decision?%0AI do not think so. It is a fact that smaller public companies have less controls in place and face more risks, as there are as many people in the smaller companies committing fraud as those in major organizations. %0A %0AI am also surprised with the humor or the ignorance - they do not protect investors of small public companies any more, with an amendment incorporated in the ‘Investor Protection Act’…%0AI have made a decision: I will never invest in smaller public companies again, as there is no independent reasonable assurance that their financial statements are reflecting the financial conditions of these companies.%0AAudiatur et altera pars hear the other side%0AGarrett Statement on Committee Passage of Sarbanes Oxley Amendment%0ARep. Scott Garrett’s R-NJ Sarbanes-Oxley amendment to the Investor Protection Act of 2009, cosponsored by Rep. John Adler D-NJ, was approved by the Financial Services Committee today by a roll call vote of 37-32.%0AThis amendment would exempt small businesses from the burdensome reporting requirements contained within Section 404b of the Sarbanes-Oxley SOX Act of 2002 .%0AThe amendment language mirrors legislation Garrett introduced earlier this year, the Small Business SOX Compliance Relief Act. %0AAlthough the stated intent of Sarbanes-Oxley was to provide investor confidence in our markets through greater accountability and disclosure, the Act has had the unintended effect of creating undueand often unbearableburdens on small businesses, Garrett said. %0AThere is a place for Federal oversight, but the weighty cost of compliance under Section 404 is slowly strangling small businesses. It is diverting valuable resources away from other legitimate business needs; creating massive and tedious documentation requirements; and discouraging the public listing of both international and domestic companies on U.S. markets. %0A %0AHonest companies are being punished and the U.S. economy will suffer as a result. Especially now, as our country struggles to emerge from a recession, the last thing American small businesses need is another barrier to economic stabilization. %0A %0AI would like to thank my colleague from New Jersey for working with me on this bipartisan amendment that will free small businesses from onerous regulations and allow them to return their focus and their resources to creating jobs for unemployed Americans and innovating for our economy.%0AThe Securities and Exchange Commission SEC has repeatedly extended the deadline for non-accelerated filers to begin providing audited assessments of their internal controls over financial reporting, an acknowledgement of continued concern about compliance costs. %0AAlthough reforms were made in 2007 to relax the guidelines for smaller companies, businesses of all sizes still report excessive compliance costs, as noted in an SEC report from September 2009 . %0A %0AIn summarizing survey responses from businesses regarding the benefits of Section 404 compliance, the SEC wrote, Which is your opinion?
It is too early to start a hype and some important facts are missing:%0A============================================%0A1) the amendment that you mention is not the only amendment that would impact section 404 of the Sarbanes-Oxley Act of 2002. There are several other amendments that would impact section 404.%0A2) the bill has only passed the comittee for financial services of the US house of representatives. It has not yet been approved by the full house, it has not been discussed or approved by the senate and not been signed by the president. So it is too early to start any hype.%0A3) I have not seen rigorous scientific studies that have showed that section 404(a) or section 404(b) have decreased restatements of financial statements that were caused by material misstatements due to fraud or error. Section 404 and regular audits of financial statements are not primarily designed to specifically prevent or detect financial statement fraud. management override for fraud is the achilles heel of internal control.%0A4) While the recent SEC study has collected some data on the costs of complying with section 404(a) and section 404(b) and ‘perceived’ benefits through surveys of companies and interviews of investors, the study has some important flaws.%0Aa) The study has not made an estimate of the costs of section 404(a) and section 404(b) for non-accelerated filers. In addition, the costs have not been put in a form that would be meaningful to an investor (e.g. how much % reduction in net profit it is going to cost) in non-accelerate filers so that the investor can make an INFORMED judgement about the cost-benefit relation.%0Ab) In the study, the SEC admits that they have not asked investors that actually invest in non-accelerated filers, but only a small number of investors that invest in much larger companies. In addition, when being asked about any perceived benefits, those investors did not know and were not given the costs of compliance.%0A5) Existing studies show that the additional audit fee for section 404(b) and the cost for section 404(a) increase degressively with increasting company size measured by total assets. The cost of section 404 is thus higher when expressed as a percentage of assets, revenues or net profit.%0A6) The benefit of any regulation that is designed to protect investors should exceed the cost that is born by these investors. Otherwise investors are not protected, but harmed by the regulation and consultants and auditors are the ones who primarily benefit from this regulation.
I have made a decision: I will never invest in smaller public companies again, as there is no independent reasonable assurance that their financial statements are reflecting the financial conditions of these companies.’
An audit of internal control over financial reporting is not the only tool that is designed to assure the reliability of the financial statements of non-accelerated filers:
Non-accelerated filers (i.e. smaller public companies) have been required to have internal control over financial reporting by the Securities Exchange Act (as amended by the Foreign Corrupt Practices Act) since 1977.
Non-accelerated filers are already required to have their managment perform an assessment of the effectiveness of their internal control over financial reporting (i.e. section 404(b) of the Sarbanes-Oxley Act).
In addition, non-accelerated filers are required to have disclosure controls and procedures which cover all disclosures in quarterly, annual and ad-hoc reports and cover more than just the financial statements. In addition, their management also has to assess the effectiveness of those disclosure controls and procedures every quarter. Fraudulent financial reporting is subject to administrative sanctions by the SEC (including officer and director bars and monetary penalties) and is subject to criminal sanctions by the Department of Justice (including jailtime).
Non-accelerated filers are also required to have their consolidated financial statements audited by a registered public accountant. As part of his audit, the registered public account decides in which areas of the financial statements it is more efficient to audit the effectiveness of internal control over those areas (i.e. tests of controls) and in which areas it is more efficient to audit the financial statement items themselves (i.e. substantive tests, such as confirmation of receivables, confirmation of cash and liabilities, etc.).
Sarbanes-Oxley’s provisions for the protection of whistleblowers also apply to non-accelerated filers. However, the board of directors or the audit committee of companies who do not have a listing on a national securities exchange in the US are not required to establish a system for the receipt of whistleblowing complaints.
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- The Obama administration is strongly supporting the amemdment.
The House Financial Services Committee, under pressure from the White House, voted to exempt small public companies from 404b. White House Chief of Staff Rahm Emanuel lobbied members of the Committee to exempt small public companies.
We already have an agreement:
Committee Chairman Barney Frank (D., Mass.) said White House Chief of Staff Rahm Emanuel negotiated with Adler on behalf of the White House and the Treasury Department to avoid a more damaging amendment that would have exempted firms already covered by Sarbanes-Oxley-those with market capitalization of less than USD700 million.
‘Mr. Adler was persuaded that it would be better public policy to do a USD75 million forever carve-out,’ Frank told reporters. Sarbanes-Oxley requirements already are suspended for those companies, he added.
Jen Psaki, deputy White House press secretary, said it is a strong bill and noted, Our focus must be on addressing the threats posed to investors and consumers by large, interconnected companies rather than placing an undue burden on small businesses. We are working closely with Congress to determine the best vehicle for getting that accomplished.
- Several Sarbanes Oxley professionals have already been informed by smaller public firms that they will not be needed in 2010.
- About my right to (not) invest in small public firms that will not be under 404b.
Yes, I have made a decision: I will never invest in smaller public companies again, as there is no independent reasonable assurance that their financial statements are reflecting the financial conditions of these companies
Securities and Exchange Commission Chairman Mary L. Schapiro wrote a letter to the committee on Oct. 16 opposing an exemption, saying the law ‘leads management to better understand financial reporting risks, put in place appropriate controls to address financial reporting risks, and addressing internal control deficiencies in a more timely fashion.’
Former SEC chairman Arthur Levitt was sharply critical of any efforts to roll back Sarbanes-Oxley. ‘Any member of Congress that supports the weakening of Sarbanes-Oxley is by definition anti-investor and will bear that responsibility for their legislative careers,’ Levitt said.
According to New York Times
The House Financial Services Committee this week approved an amendment to the Investor Protection Act of 2009 a name George Orwell would appreciate to allow most companies to never comply with the law, and mandating a study to see whether it would be a good idea to exempt additional ones as well.
- The Obama administration is strongly supporting the amemdment.
The Maloney-Garrett amendment no. 9 would temporarily exempt non-accelerated filers from compliance with section 404(b) until the SEC and the GAO have completed a study to evaluate the costs and benefits of section 404(b) for non-accelerated filers. The exemption would be at least until June 1, 2011.
The Capuano-Garrett amendment no. 32 would require the SEC to study whether to include an additional less than USD 250 million revenue filter for issuers that have a public float of less than USD 700 million in its definition of a smaller public companies.
The Garrett-Adler amendment no. 44 would permanently exempt non-accelerated filers from compliance with section 404(b). It would also require the GAO and the SEC to study how the cost of compliance with section 404(b) could be reduced for issuers with market caps between USD 75 and 250 million and whether such cost reductions or a complete compliance exemption would encorage companies to list on securities exchanges in the US.
The amendments have been made sequentially. It would seem that the content of the Garrett-Adler amendment no. 44 would sort of overrule the Maloney-Garrett amendment no. 9 by exempting non-accelerated filers permanently without any further condition.