When the SEC proposed significant changes to Emerging Growth Company accommodations and filer status classifications, the response from academics and former regulators was clear: the Commission's economic analysis underestimated the negative impacts on financial reporting quality and investor trust. Their comment letter, signed by 115 professors, former regulators, and accounting practitioners, dismantled several persistent myths about internal control audits and scaled disclosure requirements.
These myths matter because they've shaped regulatory thinking. If you're building or defending a compliance framework, you need to understand what the evidence actually shows about auditor attestation, control quality, and investor protection.
Myth 1: ICFR Audits Are a Compliance Tax With No Measurable Benefit
Reality: Research over two decades demonstrates that external audits of internal controls over financial reporting provide benefits that exceed their costs. Ge, Koester, and McVay's 2017 study found that the benefits of Section 404(b) audits surpass measurable costs. Another analysis by Barth, Landsman, Schroeder, and Taylor showed that the costs of ICFR audits are minimal compared to the investor losses they prevent.
The Sarbanes-Oxley Act of 2002 established external ICFR audit requirements to address a market failure: investors couldn't distinguish companies with reliable controls from those without them.
Removing external auditor attestation doesn't eliminate control risks. It shifts them to investors, who lack the access and expertise to evaluate control effectiveness themselves.
Myth 2: Larger Companies Need ICFR Audits, But Smaller Filers Don't
Reality: The SEC's proposal removes the requirement for external ICFR audits for registrants with up to $2 billion in public float and registrants of any size in their first five years post-IPO. Yet these are precisely the registrants for whom assurance and reporting quality are most critical. Smaller and newer public companies have a higher risk of weak controls and material misstatements than larger, established filers.
This is based on decades of enforcement actions and restatements. Companies in their first years as public registrants face the steepest learning curve in implementing effective controls. External auditor attestation during this period serves as both validation and deterrent.
Scaling back auditor involvement during this high-risk period removes oversight when it delivers the most value.
Myth 3: Reduced Disclosure Requirements Don't Materially Affect Investment Decisions
Reality: The proposal allows nonaccelerated filers and IPO companies in their first five years to adopt scaled disclosure requirements, including only two years of financial statements instead of three. This disproportionately burdens retail investors.
Reducing from three years of income statements, cash flows, and changes in owners' equity to two years limits investors' ability to make informed decisions. Evidence suggests such reductions lead to less informative prices and weaker investment performance for investors with fewer resources.
Professional investors can demand additional information or compensate through sophisticated analysis. Retail investors can't. Reducing standardized disclosure widens the information gap between sophisticated and unsophisticated market participants, undermining market confidence.
Myth 4: Reducing Reporting Requirements Will Increase IPO Volume
Reality: The Commission's economic analysis overestimates the benefits of reduced reporting requirements in increasing IPO listings. The decline in public companies is a global phenomenon, not isolated to the United States, and results from various causes, not primarily from reporting requirements.
Professor Dambra's comment letter on the proposal states: "While I can see the benefits to extending the ICFR exemption, the Commission should be clear it's not costless and experts on the JOBS Act do not expect this to increase IPO volume."
The decision to go public or remain private depends on multiple factors: access to private capital, founder control preferences, competitive dynamics, litigation risk, and strategic flexibility. Reporting costs matter, but they're not the main constraint preventing companies from accessing public markets.
Myth 5: These Changes Represent Incremental Refinement
Reality: The scope of proposed changes is unprecedented in the SEC's 90-year history. The proposal includes exemption from ICFR audits for filers up to $2 billion in float, exemption from ICFR audits for all IPOs in their first five years regardless of size, and reduced reporting requirements to two years of financial statements for IPOs in their first five years and for all nonaccelerated filers.
The comment letter signatories requested a 90-day extension beyond the initial 60-day comment period, noting that overlapping comment periods on multiple consequential proposals created insufficient time for proper analysis and stakeholder input.
When regulatory changes affect fundamental investor protections, the process matters as much as the substance. Accounting standard-setting relies on strict due process and open deliberations because rushed changes generate unintended consequences that take years to correct.
What to Do Instead
If you're evaluating your organization's controls and disclosure practices amid regulatory uncertainty, don't assume scaled requirements are optimal. Consider three principles:
First, maintain external auditor attestation of ICFR even if it becomes optional for your filer category. The credibility with investors and the deterrent effect on control breakdowns justify the cost for most public companies.
Second, provide three years of financial statements regardless of minimum requirements. The marginal cost of an additional year is minimal compared to the signaling value of comprehensive disclosure.
Third, engage in standard-setting processes when fundamental investor protections are at stake. The 115 signatories to this comment letter understood that regulatory decisions made without adequate evidence or stakeholder input create compliance frameworks built on myths rather than demonstrated outcomes.
The lessons of the early 2000s shouldn't be forgotten. Reliable financial reporting isn't a compliance burden to minimize. It's the foundation of capital market credibility.
