While not explicitly saying at what size a public company should begin to have its external auditor attest to management’s assessment of internal control over financial reporting (ICFR), Securities and Exchange Commission (SEC) Acting Chair Mark Uyeda called for a rethink of the current framework to simplify ongoing reporting obligations—at least for smaller public companies.
And it is likely that more companies will not have to comply with Section 404(b) of Sarbanes-Oxley Act of 2002 until they become much bigger if the SEC starts rulemaking during the Trump administration which has promised to cut red tapes and roll back regulations.
For example, President Trump on April 9, 2025, issued an executive order to rescind anti-competitive regulations.
“Regulations that reduce competition, entrepreneurship, and innovation – as well as the benefits they create for American consumers – should be eliminated,” the executive order states. “This order commences the process for eliminating anti-competitive regulations to revitalize the American economy.”
Industry groups have always pointed to the auditor attestation of ICFR as one of the biggest burdens for smaller public companies. They believe the requirement provides little to no benefits while being costly. Biotech companies especially said that they could be spending the money on research and development instead on ICFR.
Moreover, some companies cite Section 404(b) as a deterrent to going public. And they have won incremental concessions from the SEC in the past.
But this time around, the commission might provide even bigger regulatory breaks with a simpler framework. As it is, definitions of classes of companies which set threshold at which certain rules are triggered for compliance are too complex.
The SEC “should ensure that their ongoing reporting obligations are proportionate to their size and resources,” Uyeda said at the 44th annual small business forum in Washington on April 10. “Under the commission’s current rules, a company with a $250 million public float is subject to the same disclosure requirements as a company with a $250 billion public float.”
Uyeda has made similar remarks during a speech in Tampa, Florida late February.
Paul Atkins to Likely Act on Section 404(b)
And Paul Atkins, who was confirmed by the Senate to be the chair of the SEC last week, will also embrace a deregulatory environment in line with President Trump’s policies.
Atkins was already not a fan of Section 404(b) when he served as a commissioner from 2002 to 2008.
In September 2005 during a small business forum, Atkins said he was “very sympathetic” to the concerns about Section 404. Congress passed Sarbanes-Oxley over two decades ago to prevent a repeat of big accounting scandals that toppled companies like Enron and WorldCom.
“Some justify any cost in this area as the price to pay to prevent another Enron-type collapse. Well, I certainly think that good internal controls, which have been required since the 1970s, are important and valuable for a company and its shareholders,” Atkins said almost 20 years ago. “But it is certainly not clear to me that documentation of internal controls would have been able to prevent the type of collusive fraud by management that we saw in the recent corporate failures.”
Today, the acting chair said that the SEC has not updated its thresholds for how companies qualify as an accelerated or large accelerated filer since those thresholds were set in 2005.
The commission made a change to the definition of a smaller reporting company (SRC) in 2020, but “the different filer categories are now complex and sometimes overlap,” Uyeda said.
Non-accelerated filers and certain SRCs are exempted from Section 404(b). Emerging Growth Companies (EGCs) also get a break for five years.
“The result is that some smaller reporting companies must provide an auditor attestation of the company’s evaluation of its internal control over financial reporting, while others do not,” he pointed out. “A more harmonized regulatory regime for who qualifies as a large, mid-sized, and small company, together with scaled disclosure requirements, can help ensure that the commission’s rules are tailored to a company’s sizes and resources, while still maintaining appropriate levels of investor protection.”
However, Democratic Commissioner Caroline Crenshaw questioned the claim that overly burdensome regulation and related compliance costs are the reasons behind companies’ decision to not go public, citing recent research.
“In fact, it is widely known that the U.S. IPO market has declined for decades, but most commentators ignore that this smaller population of public companies account for a share of U.S. GDP that is roughly double that same figure in the 1990s,” Crenshaw said. “While it is true that fewer companies go public, the ones that have done so are faring better than ever despite the regulatory regime. So, how do small businesses actually think about the IPO process? Is there more to the story?”
This article originally appeared in the April 14, 2025, edition of Accounting & Compliance Alert, available on Checkpoint.
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