Section 404 of the Sarbanes-Oxley Act of 2002(Management Assessment of Internal Controls): Current Regulation and Congressional Concerns

Michael V. Seitzinger
Legislative Attorney

Section 404 of the Sarbanes-Oxley Act of 2002 requires the Securities and Exchange Commission (SEC) to issue rules requiring annual reports filed by reporting issuers to state the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting and for each accounting firm auditing the issuer’s annual report to attest to the assessment made of the internal accounting procedures made by the issuer’s management. There have been criticisms that this provision is overly burdensome and costly for small and medium-sized companies.

On December 15, 2006, the SEC adopted rule changes giving smaller firms more time to comply with Section 404’s reporting requirements. Compliance with Section 404 by small and mediumsized companies was an issue in both the 109th and 110th Congresses and continued as an issue in the 111th Congress. On November 4, 2009, the House Financial Services Committee recommended H.R. 3817, the Investor Protection Act, which contained a clause, inserted as a bipartisan amendment, permanently exempting businesses with a market capitalization up to $75 million from complying with the auditing requirements of Section 404. This bill was included in H.R. 4173, the Wall Street Reform and Consumer Protection Act of 2009, as Section 7606, passed by the House on December 11, 2009. The Senate-passed bill on financial regulatory reform, S. 3217, did not have a comparable provision. House and Senate conferees on Wall Street reform approved a conference report, H.Rept. 111-517, which had a provision exempting businesses with a market capitalization of $75 million or less from complying with the auditing requirements of Section 404. Both the House and the Senate agreed to the conference report. The President signed the bill, known as the Dodd-Frank Wall Street Reform and Consumer Protection Act, into law as P.L. 111-203 on July 21, 2010.

Bills were introduced in the 112th Congress which would allow, at least temporarily, certain companies capitalized at more than $75 million to have an exemption from complying with parts of Section 404 of Sarbanes-Oxley and other provisions of the federal securities laws. One of these bills, H.R. 3606, eventually a combination of several House bills, passed both the House and the Senate and is titled the Jumpstart Our Business Startups Act (JOBS Act). The bill has a provision which would exempt certain companies with annual gross revenues of less than $1 billion from complying with the auditing requirements of Section 404(b) for up to five years. The President signed the bill on April 5, 2012.


Date of Report: April 5, 2012
Number of Pages: 8
Order Number: RS22482
Price: $19.95

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