Why is Section 404 of the Sarbanes-Oxley Act controversial?

Answer 1

"Section 404 is the most controversial provision of Sarbanes-Oxley. It requires all public companies to have internal procedures in place to prevent errors and fraud in the company's financial statements, Section 404 also requires outside auditors to assess the effectiveness of those internal controls. The Council believes Section 404 is a core element of SOX. It plays a vital role in ensuring both high quality financial reporting and investor confidence in U.S. capital markets. Any company tapping public markets to raise capital should be required to meet certain minimal standards of good corporate governance. Those standards should include strong internal controls that are subject to meaningful review and attestation by independent auditors.

However, the Securities and Exchange Commission (SEC) exempted small public companies (defined as those with a market capitalization of less than $75 million) from the auditor-attestation requirement. In September 2009, the SEC announced the exemption would end next June. But in 11-4-09 House Committee on Financial Services approved an amendment to the Investor Protection Act that would permanently exempt companies with less than $75 million in market capitalization from the auditor attestation requirement.

The turmoil is that the council believes that smaller companies have had ample time to prepare to comply with this crucial provision of Sarbanes-Oxley. Also, the need for strong internal controls is particularly important for smaller public companies, where much of financial reporting fraud has occurred."