SEC: Merry Christmas to Small Public Companies

The Public Company Accounting Oversight Board’s recent dismantling of AS2, its guide for auditors in their assessments of corporate internal controls over financial reporting, at the persistent urging of SEC Chairman Christopher Cox is further evidence of President Bush’s underlying agenda to disembowel Sarbanes-Oxley (“SOX”).  Unfortunately, the consequences of such disembowelment will likely be disproportionately borne by investors in smaller public companies.   

Few would dispute that a cost/benefit refinement of AS2 is now appropriate given the insights provided by a couple of years of real-world applications.  However, the outright repealing of AS2 has less to do with its cost/benefit shortcomings and more to do with the Republicans desperate attempt to recapture Corporate America’s affections in time for the 2008 elections, particularly since their efforts fell significantly short for the 2006 elections.  AS5, the proposed replacement for AS2, will provide for, among other liberalizations, a kindler and gentler examination of the internal controls over financial reporting for smaller public companies.  Such proposal comes after several postponements by the SEC of the SOX 404 reporting deadline for smaller public companies, currently scheduled for fiscal years ending after December 15, 2007.  The SEC also recently provided smaller public companies with another substantial break by not requiring that their auditors attest under SOX 103 to the effectiveness of their client’s internal controls over financial reporting until the following year, that being fiscal years ending after December 15, 2008.  As a former Assistant Chief Accountant with the SEC’s Division of Corporation Finance (but a “law and order” Republican Capitalist), the question I would like to pose to President Bush and Chairman Cox is this: “How do you reconcile these continuing regulatory accommodations for smaller public companies to the historical statistics which indisputably demonstrate that the smaller the company the higher the probability of materially misstated financial statements?”