House Financial Services Committee Passes Amendment to Sarbanes-Oxley Section 404(b)

    By Corporate & Public Finance

    Section 404(b) of the Sarbanes-Oxley Act requires public companies to obtain an external audit of the company’s internal controls. The outside auditor must attest to and report on the company’s internal control structures and procedures. At the time of the passage of the Sarbanes-Oxley Act, Congress determined that due to the high costs associated with obtaining an outside audit of internal control, smaller reporting companies would not immediately be subject to the requirements of Section 404(b). Smaller reporting companies are companies with a public float (computed by dividing the number of outstanding shares held by non-affiliates by the price of the company’s shares) of less than $75 million. Currently, smaller reporting companies need not comply with section 404(b) until their annual reports for fiscal years ending on or after June 15, 2010.

    On November 4, 2009, the Financial Services Committee of the House of Representatives passed an Amendment to the Sarbanes-Oxley Act permanently exempting smaller reporting companies from compliance with Section 404(b). The goal of the amendment is to reduce the disproportionately negative impact that Sarbanes-Oxley has on small- and medium-sized companies. The amendment will now move forward to a vote before the full House of Representatives.

    To date, smaller reporting companies have not been subject to compliance with Section 404(b). Under current law, smaller reporting companies would be forced to obtain an outside audit of their internal control for fiscal years ending after June 15, 2010. Should the amendment to Section 404(b) eventually be passed by Congress and signed into law, smaller reporting companies would be permanently exempt from obtaining an outside audit of internal control, so long as their public float remains below $75 million.

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