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SEC proposes easing accounting for smaller companies

Written on May 14, 2019

The SEC voted May 9 to ease accounting requirements for smaller public companies, with the SEC to collect comment from the public over the next two months prior to any final regulation.

Under the SEC proposal, public companies with less than $100 million in annual revenue would not be required to have an outside auditor attest to the effectiveness of their internal financial controls, a key requirement of the Sarbanes-Oxley Act of 2002.

Companies would still be required on an ongoing basis to perform their own assessments on the adequacy of their internal controls but would be spared the cost of paying to have an auditor certify that litmus test.

SEC Chairman Jay Clayton said the proposed rule builds on the Jumpstart Our Business Startups Act of 2012 in sparing companies some of the costs of complying with accounting regulations.

The JOBS Act was designed to spur more companies to tap the public markets for financing as a way to fund growth.

Many companies invoke an “emerging companies” clause in the JOBS Act that provides exemptions for some public companies from the auditor attestation requirement, including those that have held an IPO in the past five years but which have yet to exceed caps on revenue, growth and some classes of securities.

In a 2016 study published in the Journal of Accounting and Economics, researchers at the University of Washington and Georgetown University calculated the certification requirement as adding 36% on average to the audit costs of companies.