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USA finance professionals call to preserve the Sarbanes-Oxley Act as it is

The Centre for Audit Quality (CAQ), the Council of Institutional Investors (CII), and the CFA Institute have jointly presented their opposition to any legislation which could erode Section 404(b) of the Sarbanes Oxley-Act (SOX) or amend the definition of ‘accelerated filer’ defined under the Securities Exchange Act of 1934, in a joint letter to the USA House Financial Services Committee leadership.

Section 404(b) of the SOX requires each publicly registered accounting firm that prepares or issues the audit reports, to attest to and report on the management’s assessment of the issuer.

The letter comes at a time when USA President, Donald Trump has recently signed an executive order to downsize the Dodd-Frank Act as part of his pledge to scale back regulations for banks and businesses in the USA.

The letter read: “We commend efforts to strengthen the USA economy and help companies raise capital; however, we do not believe Section 404(b) of SOX is a regulatory burden or impediment to capital formation. In fact, we refer you to academic research that indicates that any increase in the public float threshold would not spur capital formation, and could have the unintended consequence of eroding investor confidence and the quality of public company financial reporting.”

Cited in the letter were two recent surveys of certified financial advisors and chief financial officers (CFOs), conducted by independent firms on behalf of the CAQ, from which the results suggested that Section 404(b) is beneficial to markets and investors. Based on the survey’s findings, nearly three quarters (74%) of certified financial advisors and 85% of CFOs were in favour of important investor protection provisions in SOX.

Also 82% of financial advisors and 79% of CFOs were of the opinion that SOX has improved the reliability of financial information since its enactment in 2002 when it established a wide range of measures to strengthen financial reporting.

Cindy Fornelli, CAQ executive director, said: “These polls provide yet another indicator of the extraordinary and confidence-building success of the Sarbanes-Oxley Act. The law helped to enhance the quality of financial information on which financial executives and financial advisors rely.”

Of financial advisors, 73% said that it would be beneficial to their clients if all public companies were required to have independent internal control over financial reporting (ICFR) audit. Presently companies which have below US$75m market capitalisations are exempted from adherence to SOX Section 404.

Of the CFOs in the poll, 85% agree that ICFR audit function has either greatly (34%) or somewhat (51%) supported their company while 79% believe that the SOX benefits are greater (or are equivalent) than their company costs.

Sandy Peters, head of regulatory engagement at CFA Institute said: “As policymakers consider potential changes to financial regulation, they should take care not to undermine the frameworks that are working demonstrably to protect investors and our capital markets. We call on Congress to safeguard important investor protection provisions that CFAs and their clients use to make wise investment choices.”

Ken Bertsch, executive director of the CII said: “Investors in companies of all sizes should benefit from protections provided under Section 404(b). We are pleased to join with the CAQ and CFA Institute to urge Congress to preserve 404(b) on behalf of all investors.”

The letter can be found here.

For more information on the SOX Act 2002 and the full surveys results, please see below:

The Sarbanes Oxley-Act (SOX) 2002

CAQ Pulse Poll: CFO Perspectives on the Sarbanes-Oxley Act

CAQ Pulse Poll: Certified Financial Advisor Perspectives on the Sarbanes-Oxley Act

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