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Small public companies now cleared from auditing requirements

By Nathan Peck | MiBiz
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WEST MICHIGAN — Locked in the thousands of pages of new federal financial reform legislation is a gift for small publicly traded companies.

Amid the increased regulation of Wall Street, the Dodd-Frank financial reform package included a provision easing the audit requirements for smaller, publicly traded companies. Under the revision to Sarbanes-Oxley, companies known as “non-accelerated filers” with less than $75 million in market capitalization would be exempted from the external auditing requirements.

At its heart, Sarbanes-Oxley was intended to give investors a clear view of the strength of a firm’s books and its bookkeeping methods in the wake of public accounting scandals such as Enron in the early 2000s. Under the legislation, an audit of the company’s financial performance would include the auditor’s opinion of the financial records and a second opinion on the quality of the company’s internal controls.

Sarbanes-Oxley, as passed in 2002, had initially planned to phase in the external audit requirements for the smallest publicly traded companies. The reporting requirements, known as Section 404(b), had been subsequently delayed several times for the smallest publicly traded companies as the General Accounting Office determined how to implement the requirements.

“This was a big project for companies and external auditors alike. Additional guidance came along to fine tune the process” for large corporations, said Thomas Hiller, managing partner at accounting firm BDO in Grand Rapids. “Non-accelerated filers had not jumped on board yet. There was a pool of non-accelerated filers that remained in limbo. There were a number of times that this was supposed to go into effect. There continued to be questions of the value of the audits to the cost of conducting them.”

For those who did implement the internal controls audit, the effect was to double auditing expenses for publicly traded companies in some cases, said John Novak, principal at Miller Canfield in Kalamazoo.

“Immediately the effect of 404(b) was that they needed an external opinion. It brings in added expense — you have to pay your accountants and lawyers more,” Novak told MiBiz. “The policy question was has it done anything? For smaller business, it was a larger burden. The Dodd-Frank Act tries to get many of the tweaks that are floating around and bring them together.”

The benefits in the current round of financial reform legislation could extend to larger publicly traded corporations as well. The legislation directs the Securities and Exchange Commission and Comptroller General to conduct a study investigating ways to reduce the cost for compliance for companies with market capitalization between $75 million and $250 million, while balancing the needs for investor protections.

“The … study is due within nine months and will be interesting. It could have a very big impact if they find that the comfort level with pulling back auditing requirements is there, or for extending it to $250 million,” Novak said. “It will be very beneficial for those $75 million to $250 million market cap public companies. They too, have a small base of assets and still have to meet all the reporting requirements of the largest corporations.”

A potential implication of the legislation would be to make it easier for private companies to raise market capital. Private companies have been scared off from going public because of the cost of conducting increased audit requirements, said Novak.

“This bleeds over to the private companies as well — it will have significant impact, lessen the burden, and extend some opportunities to private companies to become a public company,” Novak said. “Many have decided it was not worth it to become a public company with that (audit) burden. You cannot spread it out. Today, you have a fewer number of people to spread this burden out over, (and) it just doesn’t make sense to take on that cost.

“The overall effect of it … is that this is important, overdue and will be helpful. These companies will be able to apply their capital where it will generate value.”

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• bdo
• finance
• grand rapids
• john novak
• kalamazoo
• miller canfield
• thomas hiller
• west michigan