SEC plans to scale back Enron-era audit rules

The Securities and Exchange Commission (SEC) intends to diminish the number of companies obligated to have auditors confirm their internal financial controls, a measure that would weaken safeguards implemented following the Enron scandal in 2001. Enron, once a titan of the energy sector, swiftly descended into bankruptcy after its dubious accounting methods became evident.

The Sarbanes-Oxley Act, enacted in 2002, mandated companies to attest to possessing internal controls aimed at detecting financial misconduct. Most entities were also required to have auditors validate these controls. Currently, the SEC is proposing to exempt the majority of remaining companies from the auditor attestation requirement.

Companies with a public float under $2 billion, as well as all firms for their initial five years post-IPO, irrespective of size, would be exempt from this rule. SEC Chair Paul Atkins stated that the proposal seeks to "make IPOs great again," arguing that the costs associated with auditor attestation discourage companies from going public.

Atkins had previously expressed reservations about the requirement when he was an SEC member, contending that auditors were examining thousands or even hundreds of thousands of largely irrelevant procedures at certain companies. Approximately 1,100 large-cap companies would continue to be subject to the requirement, accounting for 94% of market value.

All companies would still be legally required to uphold robust financial controls and certify them in shareholder filings. According to data from Ideagen Audit Analytics, the number of U.S. public companies required to restate financial results has steadily declined since the implementation of Sarbanes-Oxley and has remained low.

Exempted companies have constituted 60% to 80% of annual restatements in recent years and are more prone to reporting material weaknesses in internal controls. A Government Accountability Office report from the previous year estimated that auditor attestation accounts for 13% to 19% of total audit expenses. Across the roughly 1,600 companies that would become exempt, savings could reach $400 million to $600 million.

The U.S. Chamber of Commerce contends that businesses perceive the existing auditor attestation rules as disproportionately expensive and regressive. Nasdaq supports the proposal, while investor groups and audit firms oppose it.