The preliminary recommendations to give companies a break from strict assessments of internal controls over financial reporting imposed as part of the Sarbanes-Oxley law, were approved on Wednesday, according to an Associated Press report. The controversial provision requires company executives to assess their internal controls over financial reporting and to hire outside auditors to assess those controls.
“It’s easier to say we are better off over-auditing than under-auditing,” said Janet Dolan, chief executive of Tennant Co. and head of a subcommittee that developed the proposal, according to the news report. “However, over-auditing comes at a price, and when that occurs on a large scale across all of our capital markets, the cost to our economy is huge.”
Companies have been complaining that the Sarbanes-Oxley requirements put an unfair burden on smaller firms to comply.
The small company advisory panel recommended rolling back the internal controls requirement entirely for firms with a market capitalization of $125 million or less – about 50% of firms in the market. In exchange, they would be subject to stricter corporate-governance requirements.
Larger companies – those with a market capitalization of between $125 million to about $750 million and prior-year revenue of no more than $250 million – would also be excused from hiring an outside auditor to test internal controls under recommendations approved on Wednesday. However, management at larger companies would still have to submit an annual assessment of the quality of their internal controls.
The panel is scheduled to meet January 23 and will issue its final, non-binding recommendations in the spring.
More information about the panel’s work is here .