SEC Votes To Ease Audit Mandates For Small Public Firms

The U.S. Securities and Exchange Commission voted Thursday (May 9) to ease requirements for smaller public companies to be audited by external firms, reports in The Wall Street Journal said.

The requirements were a part of stricter auditing requirements for public companies that came into effect as a result of the Enron Corp. and WorldCom accounting fraud scandals in the 1990s. This week, the SEC voted 3-1 to move forward with proposed rules that would exempt public firms with under $100 million in annual revenue from those mandated outside audits.

The publication said the SEC’s vote is part of its efforts to make public markets more attractive to businesses, though noted that the SEC would retain requirements that those smaller firms still maintain independent audit committees and adhere to additional measures aimed at preventing accounting fraud.

Proponents of the decision to ease such mandates, including Congressional Republicans and the U.S. Chamber of Commerce, have argued that the current audit requirements are too costly for smaller companies and would deter many firms from going public as a result.

“Many of these smaller companies — including biotech and healthcare companies — will be able to redirect the savings into growing their companies by investing in research and human capital,” said SEC Chairman Jay Clayton of the impact Thursday’s vote will have on the business community.

But SEC Commissioner Robert Jackson Jr., the only Democratic member, said the rule change has no basis in current market conditions and could raise the risk of more accounting fraud.

“One problem at Enron and WorldCom was that corporate insiders were free to make decisions of enormous consequence without adequate controls,” he said. “While paying auditors isn’t free, neither is fraud.”

But Bill Hinman, director of the SEC Division of Corporate Finance and the official who led the development of the proposed rule change, said the initiative impacts only smaller firms.

“Enron and WorldCom are not companies that would be eligible for this relief,” he said.