As journalist Francine McKenna points out, this proposal is the result of massive lobbying money spent by the industry, which wants to free itself from the exact rules that were adopted following the Enron-era accounting disasters. These rules not only prevented similar problems, but they were crucial for establishing the credibility and stability of the capital markets.
The Securities and Exchange Commission on Thursday proposed exempting a group of companies from getting an auditor’s opinion on their controls, a move that would benefit mostly biotechs which have been receiving a high number of warnings.
The SEC rolled out a proposal that would exempt companies with less than $100 million in annual revenue from the requirement to get an opinion on their internal controls.
SEC Chairman Jay Clayton said at an open meeting Thursday morning that the proposal, passed by a 3-to-1 vote, is aimed at “a subset of smaller companies” where he believes the additional requirement of an internal control auditor attestation “may not be an efficient way of benefiting and protecting investors.”
“Many of these smaller companies – including biotech and health care companies – will be able to redirect the savings into growing their companies by investing in research and human capital,” said Clayton.
Commissioner Rob Jackson withheld his approval for the proposed rule. Firms that would not be required to obtain an auditor opinion for internal controls under this proposal are “exactly the companies in which investors value it most,” he said.“While paying auditors isn’t free, neither is fraud,” said Jackson. “And fraud is more likely when insiders are less careful about controls.”
MarketWatch asked research firm Audit Analytics to identify all public companies with current revenue of less than $100 million that received a negative opinion from their auditors on their internal controls over financial reporting.
Audit Analytics counted 176 companies that received adverse opinions on their internal controls since 2014. That represents 70% of all adverse internal control opinions issued for all public companies and 16.5% of the opinions issued for companies with less than $100 million in revenue that were required to do so.
If the SEC’s proposed rule was in effect during this period, investors would never have known about the weak controls and vulnerability to fraud at these companies. [emphasis added]