Section 404(b) of Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act requires that the management of public companies assess the effectiveness of the internal control of issuers for financial reporting.  Section 404(b) requires a publicly-held company’s auditor to attest to, and report on, management’s assessment of its internal controls. 

The AICPA has consistently urged implementation of Section 404(b) for all publicly held companies.  Section 404(b) has led to improved financial reporting and greater transparency.  The AICPA believes that all investors in public companies should have equal benefit of the same protections.  Some small companies have argued that the regulatory cost and burden of having the assessment outweighs the benefit to investors.

During consideration of the bills that became the Dodd-Frank Wall Street Reform and Consumer Protection Act, there were several amendments offered that would have exempted a large number of public companies from section 404(b).  Ultimately, there was an exemption enacted for non-accelerated filers (companies with less than $75 million in public float).  These smaller issuers were never required by the SEC to comply with section 404(b) since enactment of Sarbanes-Oxley Act.

There were also 2 studies required by Dodd-Frank.   The first required the SEC to conduct a study on the burden caused by section 404(b) compliance for companies with a market capitalization between $75 million and $250 million.  The SEC study recommended maintaining existing investor protections of Section 404(b) for companies with market capitalization above $75 million and encouraged activities that have potential to further improve both the effectiveness and efficiency of Section 404(b) implementation.

Dodd-Frank also required the GAO to conduct a study to evaluate whether exempt issuers have fewer or more restatements, and how their cost of capital compares with issuers subject to section 404(b).  The study is due by July 2013.

Legislative Proposals

112th Congress

Since January 2011 when the 112th Congress convened, there have been continuing attempts to increase the exemption level for companies subject to section 404(b).  A number of bills have been introduced that would expand the Dodd-Frank exemption.  The exemption levels in these bills range up to all companies with a market capitalization of up to $1 billion.

In April 2012, The Jumpstart our Business Startups Act (JOBS Act) was signed into law.  It would generally exempt a new public company from compliance with section 404(b) for the first 5 years it is a public company as long as it does not exceed certain market capitalization or revenue thresholds (called an Emerging Growth Company, or EGC). This Act extends an existing two-year regulatory delay in the implementation of section 404(b) for companies who have had an initial public offering. Importantly, it does not contain an exemption. The Act also contains two provisions urged by the AICPA.  The first allows an EGC to opt-out from being treated as an EGC.  The second makes it clear that existing public companies cannot take advantage of the EGC exemptions even if they otherwise meet the criteria (not exceeding the market capitalization or revenue thresholds and less than 5 years since the IPO). Additional information on these issues is contained in the AICPA’s March 19, 2012, letter to the Senate. The bill was passed by both the House and Senate on large bipartisan votes and was signed by the President on April 5, 2012. It was originally introduced by Congressman Fincher (R-TN), and Congressman John Carney (D-DE)  with the title, “Reopening American Capital Markets to Emerging Growth Companies Act of 2011,” H.R. 3606.

Other bills with various expanded exemptions have also been introduced in the House and Senate during this Congress.  Congressman Ed Royce, a California Republican, offered an amendment during House Financial Services Committee consideration of the JOBS Act that would have exempted all public companies with a public float of less than $1 billion from the 404(b) requirements.  He withdrew the amendment when promised that his proposal would be considered separately by the Committee later this year. The AICPA continues to fight all such efforts to reduce existing investor protections.


Copy of Legislation

A copy of the JOBS Act, and all major Congressional actions leading to passage, is available on the Library of Congress's THOMAS website by searching by its bill number, H.R. 3606.  The Dodd-Frank Act is available by using the advanced search function and searching for H.R. 4173 by bill number under the 111th Congress.

AICPA Letters

March 19, 2012 Letter to the United States Senate

October 4, 2011 Letter to Chairmen Bachus and Garrett and Ranking Members Frank and Waters regarding October 5, 2011 Subcommittee on Capital Markets Mark Up of 404(b) Legislation 

May 5, 2010 Email to the Senate Opposing the Hutchison Amendment

May 5, 2010 Email to the Senate Opposing the Vitter Amendment

March 22, 2010 letter from AICPA President Barry Melancon to Senate Banking Committee Opposing Potential Amendments to Sarbanes-Oxley Section 404(b) (This letter was sent on April 21, 2010 to the entire Senate.)

December 9, 2009 letter from AICPA President Barry Melancon to the House of Representatives supporting the Kanjorski amendment

Other Legislative Letters

March 22, 2012 Center for Audit Quality/Council of Institutional Investors Letter to Senate regarding JOBS Act

March 13, 2012 Letter from SEC Chairman Mary Schapiro to Senate Banking Chairman Tim Johnson and Ranking Member Richard Shelby regarding JOBS Act

November 29, 2011Center for Audit Quality/Council of Institutional Investors Letter to Chairman Bachus and Ranking Member Frank regarding Sarbanes-Oxley 404(b) Legislation 

September 20, 2011 Center for Audit Quality/Council of Institutional Investors/CFA Institute Letter to Chairmen Bachus and Garrett and Ranking Members Frank and Waters regarding Sarbanes-Oxley 404(b) Legislation 

June 15, 2010 Center for Audit Quality/Council of Institutional Investors/CFA Institute Letter to House and Senate Conferees Opposing a Section 404(b) Exemption

April 22, 2010 Center for Audit Quality Letter to the Senate Opposing Potential Amendments to exempt smaller companies from Sarbanes-Oxley Act Section 404(b)

Staff Contact

Kate Schmucker Kiley
Director, Congressional and Political Affairs