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Mid-size companies to comply with SOX 404: SEC

Medium-size public companies should not be exempt from Section 404(b) of the Sarbanes-Oxley Act (SOX) as benefits to investors outweigh costs, according to recommendations by the US Securities Exchange Commission (SEC).

The study, conducted by the SEC’s office of the chief accountant, found no evidence to suggest changes to the accounting provision would bolster the US market for initial public offerings.

Instead the findings recommend maintaining existing requirements of Section 404(b) for accelerated filers in general.

The SEC research did not find specific evidence that potential savings from exempting medium size companies - with public float between $75 and $250million - from the requirements would justify ‘the loss of investor protections and benefits to issuers’.

The SEC report also found that costs of Section 404(b) have declined since first implementation and that investors consider auditors’ attestation on assessments of internal controls to be beneficial. It also found financial reporting is more reliable when an auditor is involved in such assessments and that there is inconclusive evidence as to whether Section 404(b) requirements are connected to issuers’ listing decisions.

The Center for Audit Quality (CAQ) said it welcomes the SEC’s recommendations to retain section 404(b).

“We are happy to see that there is no conclusive evidence linking the requirements of Section 404(b) to listing decisions of the studied range of issuers,” the CAQ said in a statement.

Section 404(b) requires public companies' auditors to report on and attest to management's assessment of its internal controls.  

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