With legislators debating whether small companies should ever have to comply with Sarbanes-Oxley section 404(b), the world’s largest anti-fraud organization believes exempting them from the audit requirements would lead to increased fraud activity.
Beginning June 15, 2010 small public companies with a public float of less than $75 million must comply with Section 404(b), which requires that they have management and independent auditors sign off on the effectiveness of their internal controls.
The Garrett-Adler amendment, recently proposed in the House o f Representatives, exempts these small companies permanently. Previously, compliance had been postponed several times while the Securities and Exchange Commission investigated its cost impact on small companies. The current June deadline was set after the results of the study were published in September.
Although the study found that the cost of compliance was not too onerous for small companies, the supporters of this amendment believe section 404(b) is a burden these organizations should not have to bear.
However, according to a press release issued by the Association of Certified Fraud Examiners, ACFE President James D. Ratley believes that exempting small companies from compliance would open them up to significant fraud losses.
“At a time when the economic downturn has heightened the risk of fraud for organizations large and small, it simply does not make sense to weaken accounting rules that are in place to protect investors," he says. "The bottom line is that internal controls are one of the best fraud prevention tools for any organization to have in place. Providing exemptions for some public companies from the SOX 404 requirements only leads to an increased risk of fraud.”
