Small Public Companies May Be Granted Audit Reprieve

The Securities and Exchange Commission took another step toward simplifying the financial reporting requirements for small public companies. It recently voted on a proposal that would allow public companies with annual revenues of less than $100 million to forgo attestation of their internal control over financial reporting (ICFR). The proposal would not eliminate the required certifications of ICFR by management.

Changes to audit requirements come on the heels of proposed simplifications to smaller public company audit disclosures and revised smaller reporting company, accelerated filer, and large accelerated filer definitions. They also come part of a broader move to lower perceived barriers to entering the public market that smaller private companies may have.

Regulatory Trends: A Brief History

One of the criticisms facing public companies is the additional compliance costs associated with the public company status. Many of the SEC requirements were put in place in the wake of the accounting scandals involving Enron and WorldCom.

As regulations for public companies increased, however, initial public offerings (IPOs) started to fall off. Not helping future IPOs is the fact that over the past several years, big name private companies—particularly in the tech sector—significantly underperformed after their IPO compared to expectations.

Regulators and legislators have been looking for ways to improve the IPO market. One of the key ways they’ve tried to do that is by loosening compliance requirements on small companies. The Jobs Act of 2012, for example, made modifications to reporting for “Emerging Growth Companies.” For the first five years after an IPO, emerging growth companies have lessened disclosure requirements, so long as they do not meet any of these conditions:

  • Annual gross revenues reach $1.07 billion or more;
  • Issues more than $1 billion in non-convertible debt in the previous three years;
  • Qualifies for large accelerated filer status

Emerging growth companies can also elect to adopt major accounting standards at the private company effective date, which generally gives them an extra year to make accounting adjustments.

A Closer Look at the Proposal

The financial statement audit changes for smaller reporting companies came out of a discussion about the revised smaller reporting company, accelerated and large accelerated filer definitions. The SEC found that in some instances, smaller reporting companies were also considered to be accelerated or large accelerated filers. Accelerated and large accelerated filers have compliance costs that the SEC had been trying to diminish for smaller companies.

To clarify the issue, the SEC voted on a proposal that would:

  • Exclude a public company that meets the definition of a smaller reporting company and that had revenues of less than $100 million in its most recent audited financial statement from the accelerated and large accelerated filer definition
  • Increase the transition thresholds for accelerated and large accelerated filers becoming a non-accelerated filer from $50 million to $60 million and for exiting large accelerated filer status from $500 million to $560 million
  • Add a revenue test to the transition thresholds for exiting both accelerated and large accelerated filer status

In voting on the smaller company proposal, the SEC made it clear that other requirements, such as compliance with the Sarbanes-Oxley Act of 2002 (SOX) and having an independent audit committee, will remain in place.

What’s Next

Companies will have 60 days to comment on the proposal following its publication the Federal Register. For more information about changes for public companies, please contact us.

Published on May 21, 2019