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Sarbanes-Oxley: Regulations Relaxed
Last week Wednesday the US Securities and Exchange Commission (SEC) revised guidelines for the interpretation of Section 404 of the Sarbanes-Oxley Act of 2002.
The new directives relax the previous interpretation which had been called burdensome and inflexible. Small companies were most often cited as being adversely affected by the law, and accordingly, the new language provides the most relief for companies under $75 million in market value and focuses on activities that are most prone to fraud. It should now be easier and less costly for these smaller companies to comply.
Section 404 tries to ensure that external auditors provide investors with accurate company information and require companies to be constantly evaluating their internal controls.
Parallel to the SEC ruling, the Public Company Accounting Oversight Board (PCAOB) also voted on new rules governing how companies are audited. The PCAOB is a private-sector, non-profit corporation created by the Sarbanes-Oxley Act to oversee the auditors of public companies.
The new PCAOB rules encourages auditors to reuse company-created financial information rather than to independently recreate all financials. The new rules lets company executives determine which areas of their business are most at risk of financial error, to assess whether proper controls are in place to contain the risk, and to evaluate how efficiency of the control policy.
These changes have been much anticipated and are sure to bring relief to many companies. It will be interesting to see the reaction to the changes by the general markets and relative to new listings on the New York and NASDAQ stock exchanges.
