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March 16, 2020
SEC Grants Limited Exemption from
Independent Audit Verification

On March 12, 2020, the Securities and Exchange Commission (the “SEC”) voted 3-1 to exempt a small set of public companies from the auditor attestation requirement in connection with the preparation of annual reports. The exemption largely applies to those companies with less than $100 million in annual revenue.

The requirement was originally introduced by the Sarbanes-Oxley Act in 2002 and mandates the approval by an outside auditor of a company’s management’s internal controls, which are the policies and procedures of a company in place to protect against accounting misstatements and fraud. The requirement remains in effect for larger companies. The exempted companies are still required to maintain effective internal controls, management still must attest to the effectiveness of those internal controls and companies’ financial statements remain subject to audit by an independent auditor, a component of which is the consideration of internal controls of financial reporting.

While this change will not apply to the vast majority of companies, representing 99.5% of total market capitalization, the hope of the SEC is that those costs saved through no longer having to obtain this external verification will be redirected into the growth of these exempted companies. SEC data estimated that the annual savings for these companies would be about 0.7% of a company’s annual revenue.

The amendments will go into effect 30 days after their publication in the Federal Register and will apply to annual reports that are due on or after the effective date.