Posted on Tuesday, May 5, 2020

 Mohini Singh, ACA, Director, Financial Reporting Policy Group, CFA Institute.

Using structured (XBRL) data to identify risk of a proposed change to SEC filer definitions

On 12 March 2020, the Securities and Exchange Commission (SEC) adopted amendments to the accelerated filer and large accelerated filer definitions. According to the SEC, these amendments will reduce burdens and compliance costs for certain smaller issuers, thereby promoting capital formation while maintaining investor protections.

Respectfully, we disagree. The mission of the SEC is to “protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.” We do not believe, however, that the amendments will achieve that result. On the contrary, we believe they will weaken investor protections. CFA Institute supports preserving the previous accelerated filer definition.

The amendments allow certain smaller reporting companies* to qualify as nonaccelerated filers and thereby to be exempted from the Sarbanes-Oxley Act Section 404(b) requirement — that is, the need for auditor attestation of internal controls over financial reporting (ICFR).

Investors are concerned that companies of this size are particularly prone to accounting issues. Indeed, the benefits of focusing on ICFR, including auditor attestation, are pronounced for smaller companies. Research has shown that the risk of a material restatement is higher at smaller companies. Since 2003, nonaccelerated US filers (companies with public float less than $75 million) have accounted for 62% of the total US financial statement restatements. The annual independent audit of ICFR, therefore, is essential as it highlights issues before they lead to material weaknesses and restatements.

We also looked at the XBRL data so that we could ascertain what the impact will be.  What did we find? The Most Affected Industry — Financial Institutions.

Based upon our analysis, the industry that will benefit most from the ICFR audit exemption would be the financial services industry.  167 small financial institutions with $33.0 billion in public float, $9.3 billion in revenue and $236.2 billion of total assets will be excluded from the Section 404(b) auditor ICFR attestation.

We think the SEC must reconsider whether such depository institutions should be exempt from the Section 404(b) ICFR audit attestation given:

  1. the recent financial crisis where there was not sufficient focus on impairment of assets;
  2. the PCAOB’s 2018 preliminary inspection findings that show loan impairments remain a key inspection finding.

Please read our comment letter.

* Companies with public float of $75 million or more but less than $700 million, and with revenues of less than $100 million.


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