Audit Firms Urge SEC: No to Internal Controls Audit Exemption for Small Companies
The idea of extending provision in section 989G of the Dodd-Frank Act exempting companies with a public float of less than $75 million from internal controls audit have met raised eyebrows from several audit firms, including Ernst & Young and Deloitte.
In the letters forwarded by the audit firms to the Securities and Exchange Commission (SEC), they have cited the good effects brought about by Section 404(b) of the Sarbanes-Oxley Act requiring internal controls audit to companies with market capitalization between $75 and $250 million. Although the audit firms acknowledged the fact that auditing a company’s internal controls could cost some amounts, they also cited the benefits gained by both the issuers and investors from the participation of auditors in internal controls report given occurrences of financial reporting fraud in some small public firms.
Giving exemptions to these tier of companies from undergoing internal controls audit may confuse investors, even to the extent of undermining their confidence on the quality of financial reports of these companies, the Center for Audit Quality warned.
Section 404 (b) of the Sarbanes-Oxley Act requires public companies to include in their management’s assessment attestation of auditors to the effectiveness of their internal controls.
Ernst & Young and Deloitte said in the letter that this provision could give meaningful information to investors to assess the strength of companies’ internal controls over financial reporting. Deloitte further warned that removing the coverage of internal controls requirements from these tier of companies would not be a wise decision.
The audit firms also commended the Audit Standard 5, which replaced the Audit Standard 2, for enabling auditors to give more focus to critical internal controls concerns, thus an improved audit.