SEC Panel Formally Recommends Small Co SOX Exemption

April 21, 2006 ( - A Securities and Exchange Commission (SEC) panel has formally recommended exempting thousands of small public companies from parts of the 2002 Sarbanes-Oxley Act (SOX).

The Associated Press, reports that, in its final meeting, the advisory committee adopted a report that includes a handful of proposals for easing rules on small companies.   One proposal calls for the SEC to override the internal-controls requirement of SOX, allowing an estimated 70% of public companies to escape from rules requiring that an outside auditor assess internal controls over financial reporting.

“The benefits that are derived by investors are really not worth the costs,” said Robert Robotti, the president of Robotti & Company LLC and one of the panelists, according to the AP. All panelists approved the report, although some opposed the internal-controls recommendation.

The recommendation is given despite a letter from former regulators urging the SEC not to allow the exemption (See Letter Urges Regulators not to Implement SOX Exemption ).   Smaller companies have complained that the costs of following the rules are disproportionately high for them.

The advisory committee’s proposal would establish two groups of small companies. Those with a market capitalization of $128 million or less, based on current stock prices, and annual revenue of no more than $125 million would be exempt from filing a management report assessing internal controls over financial reporting, and from hiring an outside auditor to assess those controls. Those with a market capitalization of as much as $787 million and annual revenue of between $10 million and $250 million would still have to file a management report each year, but would be exempt from hiring an outside auditor to assess controls.

Small-cap companies with less than $10 million in revenue would also be relieved of filing management internal-controls reports.

A final decision rests with the SEC’s five commissioners. The committee’s report is  here .