Community bankers are hoping that the Securities and Exchange Commission will adopt an advisory panel's recommendations to give small companies relief from the internal-controls provisions of the Sarbanes-Oxley Act.
On Wednesday the agency's Advisory Committee on Smaller Public Companies voted to recommend that the SEC consider exempting small publicly traded companies from some or all of the Section 404 provisions of the 2002 law. Section 404 requires top executives to certify each year that they have procedures in place to ensure their financial reporting is accurate. Companies also must hire outside auditors to verify management's conclusions.
The advisory committee recommended that the SEC exempt companies with a market capitalization of $125 million or less and annual revenues no greater than $125 million from all of the Section 404 requirements. This would generally apply to banks with less than $500 million of assets, according to the Independent Community Bankers of America.
The committee recommended that companies with a market capitalization of $125 million to $750 million and annual revenue of no more than $250 million be exempt from having to hire outside auditors to attest to the accuracy of their internal controls. Top management at these companies must still certify that they have adequate controls. Banks with assets of roughly $500 million to $4 billion would fall into this group, the ICBA said.
The recommendations were formulated by the committee's subcommittee on internal controls. In a report issued Wednesday the subcommittee said that complying with Section 404 is simply too expensive for most small companies. According to a March survey of ICBA members, the banks' average cost to comply with the provisions was $200,000 a year.
Mark A. Schroeder, the president and chief executive of German American Bancorp in Jasper, Ind., agreed with the subcommittee's assertions. If the SEC adopts the recommendations, the $918 million-asset company would fall under the second exemption category, meaning it could save as much as $100,000 a year by not having to pay an outside auditor.
"We'd still have a responsibility to certify that we have adequate controls, and I think our shareholders will take great comfort in that," Mr. Schroeder said. "The attestation requirement by auditors doesn't really add to that comfort level - it just adds cost that shareholders ultimately bear."
The $172 million-asset Allegheny Bancshares in Franklin, W.Va., would be completely exempt from the Section 404 requirements. But CEO William A. Loving said that Allegheny's shareholders could still be assured that the company had adequate controls because its bank, Pendleton Community Bank, undergoes regular examinations.
The internal-controls subcommittee's report said that smaller companies could maintain controls over financial reporting more effectively by following some of the other Sarbanes-Oxley provisions: having financial experts on independent audit committees, having management certify the accuracy of their financial statements, and hiring external auditors to audit their statements.
The advisory committee will include its recommendations in its April report to the SEC. The SEC will then decide whether to propose rule changes based on the recommendations, but no timetable has been set.
Though the first wave of Section 404 reports was included in banks' 2004 annual reports, hundreds more banks received an automatic extension for the third time from the SEC. Companies with a public float of less than $700 million have until July 15, 2007, to comply.
