In a significant development, the Securities and Exchange Commission has voted to relax internal audit controls measures that were first introduced at smaller publicly listed companies in 2002, following a string of accounting scandals including one at Enron Corp.
The SEC had proposed the change in May 2019 as part of a broader effort aimed at revising rules that might discourage smaller companies from going public.
The measure cuts the cost of compliance for small publicly traded companies who have been in the market for at least five years and who have less than $100 million in revenues as well as less than $700 million in outstanding shares.
Accounting experts and academics warned that the relaxation of the rule will further erode accountability and questioned its timing in the middle of the coronavirus pandemic.
The U.S. proposal drops a requirement, that was introduced by the 2002 Sarbanes-Oxley Act, which stated that companies must hire an independent external auditor to verify the effectiveness of their internal financial reporting controls.
“These smaller issuers will be able to redirect the associated cost savings into growing their businesses,” said SEC Chairman Jay Clayton in a statement.
He went on to add, the changes “will not impact the companies that comprise the vast majority of the public markets”.
According to the SEC’s estimates, 154 emerging growth companies and 295 of other types of issuers stand to gain; 7,198 companies will not be affected.
The measure come at a time when there is a palpable fear that China’s coronavirus could trigger a global recession.
Investor advocates have warned, the move could make it easier for companies to fudge their financial reports.
“Without independent audits, company accounting systems remain unchallenged, and over time lead to deterioration of the quality of financial reporting,” said Lev Bagramian, a securities policy advisor at Better Markets.
The SEC under the Trump Administration has systematically put in place more than two dozen measures that are designed to make life easier for corporate America.
“In the face of extensive objection from investors, we strip away a layer of investor protection for financial reporting,” said Allison Lee, the agency’s sole Democratic commissioner, who voted against the measure. “There must be a limit to the number of times we can credibly assert to investors that we act in their best interests by making policy choices they directly oppose.”