This week an article in the Wall Street Journal explored whether there might be some changes coming for Sarbanes Oxley. With President Trump talking about rolling back regulations, business groups that want Sarbanes Oxley softened may get their way.
Sarbanes Oxley requires management to assess the internal controls over financial reporting (those things which are supposed to help prevent errors and fraud). Section 404(b) requires the auditors to evaluate that assessment and provide an opinion on it.
Some say the rule is too costly for smaller companies, while those in support of it say that it has helped ensure financial reporting integrity. Companies with a market cap under $75 million have never had to comply with Section 404(b). Possibly legislation could raise that threshold to $250 million or even $500 million.
Do the rules regarding internal controls, management’s assessment, and the auditor’s evaluation do anything to reduce fraud or errors in the financial statements? The article has an interesting graphic showing the number of companies doing restatements of their financials over the years. During a 2 to 3 year period after most larger companies began complying with the internal controls rule, restatements spiked. However, since then, the number of restatements has trended downward. Is this a sign that the internal controls rules are working? In other words, are there fewer restatements because internal controls reviews are forcing companies to ultimately be more accurate in their financial reporting?
It will be interesting to see how Sarbanes Oxley changes. If this change is made, I could see others following closely behind.