I 111th CONGRESS 1st Session H. R. 1797 IN THE HOUSE OF REPRESENTATIVES March 30, 2009 Mr. Meeks of New York introduced the following bill; which was referred to the Committee on Financial Services A BILL To reform certain provisions of section 404 of the Sarbanes-Oxley Act of 2002 to make compliance with that section more efficient, with the goal of maintaining United States capital market global competitiveness.

1.

Short title

This Act may be cited as the Compete Act of 2009.

2.

Internal control reporting and evaluation

Subsection (b) of section 404 of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7262(b)) is amended to read as follows: (b)

Internal control reporting and evaluation

(1)

Auditor attestation and report

With respect to the internal control assessment required by subsection (a), each registered public accounting firm that prepares or issues the audit report for the issuer shall, at the interval determined under paragraph (2), attest to, and report on, the assessment made by the management of the issuer. The attestation and report on the management assessment shall focus on the process and system management used to identify and manage risks, identify and implement key controls, and come to a conclusion on the effectiveness of the internal controls over financial reporting. Such attestation and report shall not include a separate opinion on the outcome of the assessment, that is, the auditor shall not issue a separate (pass/fail) opinion on the effectiveness of management's internal controls over financial reporting. Any such attestation shall not be the subject of a separate engagement. (2)

Intervals for attestation and report

The Commission’s regulations under this section shall require that the attestation and report required by paragraph (1) be performed during an initial reporting period, and then at 3-year intervals. Such regulations shall require a shorter interval in the event of a major shift in the company’s structure or performance, such as a merger, a significant financial restatement, evidence of fraud, or other such events as determined by the Commission. (3)

Standards for attestation and report

(A)

Risk-based evaluation

An attestation made under this subsection shall be made in accordance with standards for attestation engagements issued or adopted by the Board. Such standards shall require that the audit of the management assessment of the internal control of the issuer shall be designed, on the basis of the probability of risk and magnitude of potential harm, to focus on those controls that are critical to the accuracy of the financial statements of the issuer, and shall be consistent with the materiality standards prescribed by the Commission under paragraph (4). Such standards shall require that the determination by the auditor of the controls that create the greatest risk to the company shall be done in consultation with management of the issuer and shall identify those greatest risks on bases of the characteristics of the industry within which the issuer operates. (B)

Reliance on the work of others

The standards issued or adopted by the Board for purposes of implementing the requirements of this subsection shall eliminate duplication of audits and examinations by— (i)allowing registered public accounting firms performing attestations and reports under this subsection to rely on examinations and inspections conducted by Federal and State regulatory agencies to the extent those examinations and inspections focus on the issuer’s risk-based internal controls; (ii)where the issuer has engaged a third-party accountant to test and provide management’s assessment of the internal control systems, permitting— (I)the third-party accountant to work with registered public accounting firms performing attestations and reports under this subsection on determining the controls to be tested and the scope of work; (II)the registered public accounting firms performing attestations and reports under this subsection to rely heavily on the work of the third-party accountant during the attestation engagement to avoid repetitive testing; and (III)management of the issuer to communicate openly with the registered public accounting firms performing attestations and reports under this subsection on all aspects of its internal controls. (C)

Definition

For purposes of subparagraph (B)(ii), the term third-party accountant means a registered public accounting firm other than the registered public accounting firm that is engaged to perform the attestation and report under this subsection. (4)

Materiality standard

The Commission shall develop a standard of materiality for the conduct of the assessment and report on an internal control under this subsection that shall be based on whether the internal control has a material affect on the company’s financial statements and is significant to the issuer’s overall financial status. .

3.

Smaller public company exemption from internal control provision

Section 404 of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7262) is amended by adding at the end the following new subsection: (c)

Smaller public company exemption

(1)

Voluntary compliance

A smaller public company shall not be subject to the requirements of this section with respect to any annual report unless such company voluntarily elects to comply with such requirements, in accordance with regulations prescribed by the Commission. Any smaller public company that does not elect to comply with such requirements with respect to an annual report shall, in accordance with such regulations, disclose that noncompliance in such report. (2)

Definition

For purposes of paragraph (1), the term smaller public company means an issuer, for which an annual report is required by section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)), that— (A)has a total market capitalization at the beginning of the relevant reporting period of less than $700,000,000; (B)has total product and services revenue for that reporting period of less than $125,000,000; or (C)has, at the beginning of the relevant reporting period, fewer than 1500 beneficial owners. .

4.

Competition for auditing services

(a)

Study required

The Commission and the Board shall conduct a study examining the lack of, and impediments to, robust competition for the performance of audits for issuers. (b)

Subjects of study

The study required by this section shall examine— (1)the causes for, and the measures that may be taken to alleviate, the concentration of audit performance in only four large public accounting firms capable of servicing the larger issuers; (2)the extent to which the Commission and the Board may, under existing statutes, take reasonable steps— (A)to increase the number of qualified accounting firms; and (B)to eliminate de minimis conflict of interest provisions; and (3)methods that may be undertaken for encouraging— (A)the largest public accounting firms to partner with smaller public accounting firms; and (B)coalitions among smaller public accounting firms to compete for business for larger and more complex issuers. (c)

Report

Within 6 months after the date of enactment of this Act, the Commission and the Board shall submit a joint report on the study required by this section to the Committee on Financial Services of the House of Representatives and the Committee on Banking, Housing, and Urban Affairs of the Senate. Such report shall— (1)contain the results of the examination of each of the subjects identified in subsection (b); (2)make recommendations to the accounting industry of measures that may be undertaken under existing statutes, regulations, and standards to alleviate the concentration described in subsection (b)(1); (3)identify the measures that the Commission and the Board should undertake to alleviate such concentration; and (4)make any recommendations to the Congress for changes in the laws administered by the Commission and the Board that the Commission or the Board consider appropriate and necessary on the basis of the examination.

5.

Principals-based guidance study

(a)

Study required

The Commission and the Board shall conduct a study comparing and contrasting the principles-based Turnbull Guidance under the securities laws of Great Britain to the implementation of section 404 of the Sarbanes-Oxley Act of 2002. (b)

Report

Within one year after the date of enactment of this Act, the Commission and the Board shall submit a joint report on the study required by this section to the Committee on Financial Services of the House of Representatives and the Committee on Banking, Housing, and Urban Affairs of the Senate. Such report shall— (1)compare— (A)the relative accounting and other costs of— (i)the principles-based Turnbull Guidance under the securities laws of Great Britain; and (ii)the implementation of section 404 of the Sarbanes-Oxley Act of 2002; in relation to (B)the relative— (i)reduction in the level of risk to investors; and (ii)increase in the level of investor confidence in the financial statements of issuers; and (2)recommend to the Congress appropriate measures to alleviate accounting and other costs in relation to the reduction of such risk and the increase in such confidence.

6.

Definitions

For purposes of this Act, the terms audit, Board, Commission, issuer, and public accounting firm have the meanings given such terms in section 2 of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7201).