While Chairman Clayton and Commissioner Peirce said the change would allow smaller companies to direct savings from the elimination of compliance costs to more productive business uses, Commissioner Lee lamented that investor concerns were not taken into account.
The SEC adopted amendments to its accelerated filer and large accelerated filer definitions that would remove the requirement that an outside auditor attest to the adequacy of internal controls over financial reporting (ICFR) for public companies with revenues of less than $100 million. According to the SEC, the new rule would reduce unnecessary burdens on smaller issuers, allowing them to redirect their cost savings into growing their businesses. Commissioner Allison Herren Lee dissented from approving the amendments, stating that they remove a "critical gatekeeping function" that improves the reliability of financial reporting (Amendments to the Accelerated and Large Accelerated Filer Definitions, Release No. 34-88365, March 12, 2020).
Amendments. Under the amendments, an issuer that is eligible to be a smaller reporting company (SRC) with annual revenues of less than $100 million will be exempt from the auditor attestation requirement. These companies must still establish and maintain effective ICFR, and their principal and executive officers must continue to certify that they are responsible for establishing and maintaining ICFR, and that they have evaluated and reported on the effectiveness of the company’s controls and procedures.
The amendments also revise the transition threshold for becoming a non-accelerated filer from $50 million to $60 million and the transition threshold for leaving the large accelerated filer status from $500 million to $560 million. According to the Commission, this approach balances the risk of frequent reclassifications resulting from a higher percentage threshold against the risk of delaying appropriate transitions due to a lower threshold. The amendments add the SRC revenue test to the transition threshold for accelerated and large accelerated filers. Without this revenue test, an issuer’s annual revenues would never factor into determining whether an accelerated filer could become a non-accelerated filer, or whether a large accelerated filer could become an accelerated or non-accelerated filer, the adopting release explained.
Finally, the amendments add a check box to the cover pages of annual reports on Forms 10-K, 20-F, and 40-F to indicate whether auditor attestation over ICFR is included in the filing. While investors can already find out whether an ICFR auditor attestation is included by searching within an issuer’s annual report, the check box disclosure requirement will make it easier for investors to identify issuers that undergo an auditor attestation with only minimal additional disclosure expense for registrants, according to the Commission.
Commissioner statements. In a statement, Chairman Jay Clayton noted that the Dodd-Frank Act exempted smaller issuers with a public float of less than $75 million from Section 404(b)’s auditor attestation requirement. The 2012 JOBS Act exempted emerging growth companies (EGCs)—companies with less than $1 billion in annual gross revenues within five years of their IPO—from 404(b). "Time has proven Congress was right," Clayton stated, advising that these provisions have incentivized more companies to join the public markets and have provided investors with more investment opportunities.
Clayton emphasized that the amendments focus on smaller, low-revenue companies that make up a very small portion of overall market capitalization. According to Clayton, companies benefiting from the amendments collectively represent less than 1 percent of total market capitalization. "The collective market capitalization of the more than 500 companies that will benefit from [these amendments] is less than one-quarter of the market capitalization of the largest company in the S&P 500," Clayton asserted.
Clayton added that the smaller issuers that are now exempt from the auditor attestation requirement must still provide executive and officer certification on ICFR and will still be subject to an audit of their financial statements, which includes the consideration of the company’s ICFR.
Commissioner Hester Peirce also supported the amendments, although she acknowledged that in her ideal regulatory regime, Section 404(b) auditor attestation would be optional for all companies. She also expressed disappointment that Commission did not fully re-align the SRC and non-accelerated filer definitions. However, she said the amendments will provide welcome relief from compliance costs saved by SRCs and business development companies that will now be available for more productive uses, such as biotech companies investing more in research and development and community banks making more loans to local businesses.
In her dissent, Commissioner Lee criticized the auditor attestation rollback as sacrificing investor protection for a modest cost reduction for issuers. According to Lee, the final rule rests in part on the "unsupported hypothesis" that getting rid of the auditor attestation requirement for small issuers will encourage more companies to go public. There is no evidence for this intuition, Lee said, adding that it "animates a number of other recent policy choices" that she and former Commissioner Robert Jackson had also criticized.
Lee also took issue with the idea that the modest compliance savings would be used to more productive ends. Any cost savings for these companies may be diminished or negated by an increase in the cost of capital for issuers that do not have auditor attestations, she said, noting that comments had indicated that investors do not want a change to the auditor attestation requirement. Investors may want a premium to compensate for the increased risk resulting from the lack of auditor attestation, Lee warned. "There must be a limit to the number of times we can credibly assert to investors that we act in their best interests by making policy decisions they directly oppose," Lee remarked.
The release is No. 34-88365.
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