Last week, Chairman Cox testified that once again there would be a delay in the extension of Section 404(b) to smaller companies (defined as those with less than $75 million in equity). Recall that the section requires the outside auditor to attest to management's assessment of the system of internal controls. Section 404 is important because it provides accountability by requiring management to assess internal controls. Subsection (b) gives the provision teeth by requiring a third party to review management's efforts.
The attestation requirement has, however, apparently been expensive. Moreover, with only four large auditors, there is little opportunity for companies to shop around and find more reasonably priced services. Providing smaller companies (the Chairman contended that the number was 5000) with more time makes sense. First, it provides additional time for these companies to get their accounting systems and internal controls in order. Second, it still provides for accountability. Management still must conduct the assessment.
While there may be 5000 smaller companies, it is likely that a not insignificant number already comply with Section 404(b). As Section 404(b) becomes best practice, those companies seeking equity infusions from private funds or are seeking to sell out to larger entities all have an incentive to comply.