On Friday, April 22, 2011 the SEC staff released a study related to auditor attestation of internal controls over financial reporting (ICFR). The study, required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), is focused on how the SEC can reduce the burden of the ICFR auditor attestation requirement on small accelerated filers with public floats between $75 million and $250 million without negatively impacting investors.[1] The Dodd-Frank Act also directed the SEC to consider in the study whether reducing the compliance burden or completely exempting such companies from the ICFR auditor attestation requirement would encourage companies undertaking initial public offerings to list on exchanges in the U.S. A summary of the staff’s conclusions follow:
- The costs of ICFR auditor attestation have declined since the Commission first implemented the ICFR audit requirement, particularly in response to the 2007 reforms;[2]
- Investors generally view the auditor‘s attestation on ICFR as beneficial;
- Financial reporting is more reliable when the auditor is involved with ICFR assessments; and
- There is not conclusive evidence linking the requirements of ICFR auditor attestation to listing decisions of the issuers that were studied.
The staff considered public input suggesting certain means to reduce the compliance burden of the ICFR audit, and concluded that these suggestions should not be implemented. The staff based its conclusion on its belief that the suggestions would possibly be detrimental to the effectiveness of audits of ICFR and would not maintain investor protections provided by ICFR audits.
After considering the information gathered from internal and external sources, the staff made the following two recommendations:
- Maintain existing investor protections of the ICFR auditor attestation requirement for accelerated filers, which have been in place since 2004 for domestic issuers and 2007 for foreign private issuers;
- Encourage activities such as the following that have the potential to further improve both effectiveness and efficiency of the ICFR audit:
- PCAOB to publish its observations on top-down, risk based audits of ICFR developed from their inspections; and
- COSO to allow constituents to provide comments on the internal control framework update project on improvements to designing, implementing and assessing internal controls.
As a result of the study, the current ICFR auditor attestation requirements remain unchanged. At this point, there is no indication that Congress would act to change the ICFR audit requirement for accelerated filers.
The study is available at: http://sec.gov/news/studies/2011/404bfloat-study.pdf.