The Case Against Exempting Smaller Reporting Companies From Sarbanes-Oxley Section 404: Why Market-Based Solutions are Likely to Harm Ordinary Investors (original) (raw)

2009, FORDHAM JOURNAL OF CORPORATE & FINANCIAL …

THE CASE AGAINST EXEMPTING 329 SMALLER REPORTING COMPANIES reporting company's management annually assess and publicly disclose the effectiveness of the company's ICFR 6 , and (ii) the company's outside auditor attest to that assessment. 7 The primary objective for Section 404 is presumably to improve the accuracy of financial disclosure by requiring companies to maintain effective ICFRs.' The controversy surrounding Section 404, however, has not focused on the provision's underlying objective, 9 but rather on whether the substantial compliance costs involved with Section 404 exceed the statute's benefits.' 0 In its June 2003 release adopting the implementation rules for Section 404," the Securities and Exchange Commission (the "SEC") estimated that the annual cost for Section 404 compliance would run $91,000 per company. ' 2 Subsequent studies have shown, however, that the actual cost is exponentially greater than the 6. SOX § 404(a), 15 U.S.C. 7262(a) (2002). 7. Id. § 7262(b). 8. CCMR REPORT, supra note 3, at 119. 9. Id. at 115. Note, however, that the CCMR Report states a slightly different objective for Section 404 than is proposed by this Article, as the CCMR Report focuses more on a possible public perception goal. The CCMR Report states that Section 404 "is aimed at reducing the market impact from accounting 'errors'whether from fraud, inadvertent misstatements, or omissionsby assuring investors that public companies maintain effective controls over financial reporting." Id.