March 12, 2020 / 5:35 PM / 18 days ago

U.S. SEC votes to exempt smaller companies from independent audit reviews

WASHINGTON (Reuters) - The U.S. securities regulator on Thursday voted to relax internal audit controls introduced at smaller publicly listed companies in 2002 following a string of accounting scandals including at now-defunct energy company Enron Corp.

The Securities and Exchange Commission proposed the change in May 2019 as part of its broader push to trim rules that might discourage smaller companies from going public. It would cut compliance costs for such companies publicly traded for more than five years, with less than $100 million in revenues and less than $700 million in outstanding shares.

But accounting experts and academics have said the change would reduce accountability, and questioned the timing in the middle of the coronavirus outbreak.

The proposal drops a requirement, introduced by the 2002 Sarbanes-Oxley Act, that such companies must hire an independent external auditor to verify the effectiveness of their internal financial reporting controls.

“These smaller issuers will be able to redirect the associated cost savings into growing their businesses,” SEC Chairman Jay Clayton said in a statement.

The changes “will not impact the companies that comprise the vast majority of the public markets,” he added.

Clayton said the SEC estimates 154 emerging growth companies and 295 of other types of issuers stand to gain. He added that 7,198 companies will not be affected.

As fears grow that disruptions caused by the coronavirus will spark a global recession, investor advocates said the move could make it easier for companies to fudge their financial reports.

“Without independent audits, company accounting systems remain unchallenged, and over time lead to deterioration of the quality of financial reporting,” said Lev Bagramian, a securities policy advisor at Better Markets.

A HELPING HAND

Congress first loosened Sarbanes-Oxley’s accounting requirements in 2012 to give startups a helping hand.

Under the Trump administration, the SEC has put in place more than two dozen measures, including trimming rules, designed to make life easier for corporate America.[nL2N27L0X4]

Commissioners voted in favor of the rule change 3-1. Allison Lee, the agency’s sole Democratic commissioner, voted against it.

“In the face of extensive objection from investors, we strip away a layer of investor protection for financial reporting,” said Lee. “There must be a limit to the number of times we can credibly assert to investors that we act in their best interests by making policy choices they directly oppose.”

Reporting by Katanga Johnson; Editing by Michelle Price, Chizu Nomiyama, Sonya Hepinstall and Richard Chang

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