SEC to propose delaying audit requirements for small firms

The Securities and Exchange Commission will propose giving the smallest companies an additional one-year delay before having to comply completely with the audit provisions of the Sarbanes-Oxley law, Commissioner Roel Campos said Monday.

The extension for the deadlines, which have been pushed back four times from the original date of April 2005, are the latest indication that the SEC is trying to respond to small companies’ complaints that the audit requirements are too onerous and too expensive.

If approved at the Dec. 13 commission meeting, the extension would coincide with regulators’ proposing a streamlined rule for outside accountants and more precise guidance for management on how to comply with the audits.

“It makes sense for the smallest companies to have another year,” Campos said Monday.

The additional time will give those companies with market value of less than $75 million “all the benefits of having the new guidance put in place first,” Campos said.

The co-chair of a small-company advisory committee to the SEC said he supported the latest delay.

“I think it’s a good idea” because it will take time for everyone to learn the new rules, said Herbert S. Wander, a partner at Chicago law firm Katten Muchin Rosenman.

Another member of the advisory committee disagreed.

“An extension just continues to be a nonsolution,” said Janet Dolan, former chief executive of Minneapolis-based Tennant Co. “It puts off the ultimate question of what is the appropriate level of Sarbanes-Oxley governance requirements for small companies.”

The advisory group recommended that companies with market values of as much as $787.1 million -- nearly 80% of all U.S. public companies -- be exempted entirely from the audit provisions.

The topic came up Friday at a conference of lawyers in Washington. “All companies will be covered eventually,” John White, director of the SEC’s division of corporation finance, said in a speech. “There is not a plan to exempt any company permanently.”

White said in an interview afterward that the smallest companies would be permitted to “postpone the audit requirement beyond 2008.” He would not elaborate.

In August, the SEC proposed the latest delay, giving the management of the smallest companies until the filing of annual reports after Dec. 15, 2007, to certify the effectiveness of their internal controls. They were given until after Dec. 15, 2008, to file reports where outside auditors signed off on the adequacy of those controls.

Also Monday, SEC commissioners voted 5 to 0 to propose scrapping rules that require short sellers to unload stock at a price above or equal to the last traded price. The vote follows the release of an SEC pilot study in September that found removing the restriction doesn’t allow traders to artificially drive down share values.

“The evidence that we’ve gathered from the pilot suggests little empirical justification for maintaining short sale price test restrictions,” SEC Chairman Christopher Cox said at an agency meeting in Washington.

A short seller makes a bet that a company’s stock price will fall by borrowing shares and selling them on the open market. If the stock declines, the short seller buys the shares back at a lower price, returns them to a broker and pockets the gains.

The SEC created rules to limit the strategy after the 1929 stock market crash, when traders flooded the market with sell orders, exacerbating the crisis. Improved surveillance by regulators and including decimals in stock price listings have “undermined the effectiveness” of the prohibitions, Cox said.

The SEC study removed trading restrictions on about 1,000 stocks, including shares of Walt Disney Co., Goldman Sachs Group Inc. and Home Depot Inc. The change didn’t lead to “large negative” returns, the agency said.

The SEC’s proposed change, which was submitted for public comment for 60 days, also would ban the regulatory arm of NYSE Group Inc. and the NASD from imposing price restrictions on short sellers.