\405\ See, e.g., Alexander et al. 2013 Study, note 401 above.
---------------------------------------------------------------------------

    In the Proposing Release, we presented an analysis of audit fees
from 2014-2017 for low-revenue issuers that are subject to the ICFR
auditor attestation requirement compared to low-revenue issuers not
subject to this requirement.\406\ In particular, we compared audit fees
in these recent years for accelerated filers that are subject to the
ICFR auditor attestation requirement and have revenues of less than
$100 million, relative to the audit fees of issuers in our comparison
populations (non-accelerated filers, other than EGCs, and EGCs, neither
of which is required to comply with the ICFR auditor attestation
requirement) \407\ that also have revenues of less than $100 million.
Based on this analysis, and with consideration for the difference in
size of the affected issuers versus the comparison sample, we derived a
percentage estimate of 25 percent of total audit fees, and a dollar
estimate of about $110,000 per year, that would be saved by issuers
newly exempt from the ICFR auditor attestation requirement.\408\ As
discussed in more detail in the Proposing Release, the percentage
estimate is generally consistent with the estimates, ranging from
approximately five to 35 percent of total audit fees, from a variety of
other analyses using data from after the 2007 change in the ICFR
auditing standard.
---------------------------------------------------------------------------

    \406\ See Section III.C.3.b. of the Proposing Release, note 4
above.
    \407\ The Proposing Release, note 4 above, provides more
information on why we rely on these comparison populations, how they
compare to the affected issuers, and how differences between the
comparison populations and the affected issuers could affect our
inference. See Section III.C.2. of the Proposing Release, note 4
above.
    \408\ See Section III.C.3.b. of the Proposing Release, note 4
above.
---------------------------------------------------------------------------

    Several commenters indicated that the expected cost savings are
difficult to accurately quantify.\409\ We acknowledge that, as
discussed in more detail in the Proposing Release, our estimate is
subject to significant uncertainty.\410\ However, these commenters did
not provide alternative methodologies or data for obtaining an estimate
of the average savings. One recent study focusing on low public float
issuers separately considered the subset of issuers with less than $100
million in revenues in their sample and estimated that an exemption
from the ICFR auditor attestation requirement would result in an audit
fee savings of $135,000 per year for these issuers.\411\ While this
analysis was focused on lower float issuers, it is generally supportive
of the order of magnitude of our estimate. One commenter questioned
whether our estimate considers the incremental costs associated with an
audit approach that does not have the benefit of a related audit of
ICFR.\412\ We note that our analysis is intended to capture this
effect, as the issuers in the comparison samples which we use to derive
our estimate generally require this type of an audit approach because
they are not subject to the ICFR auditor attestation requirement.
---------------------------------------------------------------------------

    \409\ See, e.g., letters from EY, Grant Thornton, and RSM.
    \410\ See Section III.C.3.b. of the Proposing Release, note 4
above.
    \411\ See McCallen et al. 2019 study, note 308 above.
    \412\ See letter from BDO.
---------------------------------------------------------------------------

    We therefore maintain, without change, our estimate of $110,000 in
average audit fee savings per year per affected issuer that would be
newly exempt from the ICFR auditor attestation requirement. As noted in
the Proposing Release, the audit fee savings are expected to vary
across the affected issuers, with some experiencing smaller savings and
some experiencing much larger savings depending on their individual
circumstances. In line with this expectation, several commenters
insisted that any reductions in audit fees resulting from the
amendments would depend on facts and circumstances and vary widely
among issuers.\413\ Consistent with these costs savings being highly
varied, a number of commenters to the Proposing Release provided
estimates of costs that specific issuers had incurred or expected to
save ranging from $40,000 per year to costs of over $2 million dollars,
though most of these estimates include costs other than audit fees
(which are discussed below), some include one-time start-up costs as
well as ongoing annual costs, and the largest estimate includes costs
attributable to SOX Section 404(a) and

other SOX requirements.\414\ Similarly, a few of the commenters to the
SRC Proposing Release cited costs of $400,000 to over $1 million
associated with the ICFR auditor attestation requirement (though it is
possible that these estimates also include costs other than audit
fees).\415\
---------------------------------------------------------------------------

    \413\ See, e.g., letters from EY, Grant Thornton, and PWC.
    \414\ See letters from Cerecor (estimating a total of $1 million
in expected savings for 2020 associated with an exemption from the
ICFR auditor attestation requirement), Concert (estimating expected
audit fees associated with the ICFR auditor attestation requirement
to represent approximately 45 percent of its total audit fees),
Guaranty (estimating future annual costs of $40,000 in personnel and
external audit costs associated with ongoing compliance with the
ICFR auditor attestation requirement, as well as a higher estimate
of costs expended for their first year of compliance in 2018 of
$167,745 in audit fees as well as $72,000 and 2,340 labor hours
expended across the issuer's accounting, information technology and
risk management offices), Pieris (estimating that their first year
of compliance with the ICFR auditor attestation requirement would be
associated with a total of $1.5 million in costs), Syros (estimating
that its expected additional costs for compliance with the ICFR
auditor attestation requirement would range from $250,000 to
$400,000 per year, including incremental external auditor fees,
consultant fees, and an increased burden on employee resources), and
Terra Tech (estimating over $2 million in costs expended in 2018 for
meeting all of its SOX compliance requirements, including but not
limited to the ICFR auditor attestation requirement, representing
costs to build a new information technology infrastructure, to hire
new staff and consultants, and to pay auditing fees).
    \415\ See note 208 of the Proposing Release, note 4 above.
---------------------------------------------------------------------------

    One commenter noted that the requirement to implement scaled, risk-
based audits of ICFR should already result in an appropriately reduced
cost of the ICFR auditor attestation requirement for many affected
issuers.\416\ We note that our quantitative methodology is intended to
reflect the current cost of the ICFR auditor attestation requirement,
including the benefits of scaling. Also, while the adoption of AS 2201
in 2007, which facilitated the scaling of audits of ICFR, was found to
have initially led to lower audit fees, there is evidence that these
costs began to increase again around the year 2010.\417\
---------------------------------------------------------------------------

    \416\ See letter from CFA.
    \417\ See Section IV.B.1. above.
---------------------------------------------------------------------------

    Finally, we note that some issuers may voluntarily choose to
continue to make these expenditures if they deem the benefits of the
ICFR auditor attestation to exceed the cost, and that the extent of
savings may be affected if auditors continue to test the operating
effectiveness of some controls as part of their financial statement
audit. In such cases, the audit fee savings may be reduced, but we
would expect the potential costs of expanding the exemption from the
ICFR auditor attestation requirement to be correspondingly lower as
well.
d. Additional Potential Compliance Cost Savings
    The ICFR auditor attestation requirement is associated with other
compliance costs beyond audit fees, including outside vendor costs and
internal labor costs.\418\ However, these costs are difficult to
measure because they are not required to be reported. Practitioner
studies based on surveys of issuers often report non-audit costs of the
internal control assessment and reporting requirements of SOX Section
404 in particular or of SOX in general, but the costs attributable to
the ICFR auditor attestation requirement versus the SOX Section 404(a)
management ICFR reporting requirements or other requirements are
generally not broken out separately.\419\
---------------------------------------------------------------------------

    \418\ See, e.g., Leuz and Wysocki 2016 Study, note 396 above.
    \419\ See, e.g., Protiviti 2018 Report, note 317 above (finding,
for example, total internal costs associated with all aspects of SOX
compliance to be $282,900 for 2018 for respondents with less than
$100 million in revenues) and SOX & Internal Controls Professionals
Group, Moss Adams LLP, and Workiva (2017), ``2017 State of the SOX/
Internal Controls Market Survey'' (``2017 SICPG Survey Report''),
available at www.mossadams.com/landingpages/2017-sox-and-internal-controls-market-survey.
---------------------------------------------------------------------------

    The Proposing Release presented an analysis of data from the 2008-
09 Survey on the non-audit costs of SOX Section 404 in general, such as
outside vendor costs, labor, and non-labor costs (such as software,
hardware and travel costs), as well as the percentage of the outside
vendor costs and labor hours that were attributable to the ICFR auditor
attestation requirement. Based on this analysis, we estimated that the
average non-audit costs attributable to the ICFR auditor attestation
requirement at the time of the survey were approximately $125,000 per
year.\420\ Adjusting this historical cost downward slightly to account
for the fact that some of these expenditures may now be required even
in the case of a financial statement only audit (due to the risk
assessment auditing standards issued subsequent to this survey), we
estimated that the average non-audit costs attributable to the ICFR
auditor attestation requirement are currently approximately $100,000
per year.\421\ As noted in the Proposing Release, this estimate is
subject to uncertainty because it is unclear exactly how the current
costs may differ from the survey responses a decade ago, and the costs
may be different for low-revenue issuers.
---------------------------------------------------------------------------

    \420\ See Section III.C.3.c. of the Proposing Release, note 4
above.
    \421\ Id.
---------------------------------------------------------------------------

    Commenters did not provide alternative methodologies for obtaining
an estimate of the average non audit-fee savings. One recent study
focusing on low public float issuers considered the potential effect of
the ICFR auditor attestation requirement on selling, general and
administrative (``SG&A'') expenses other than audit fees, and concluded
that there was an association with an increase in these internal costs,
but was unable to reliably estimate the magnitude of this effect.\422\
We therefore maintain, without change, our estimate of $100,000 in
average non-audit compliance cost savings per year per affected issuer
that would be newly exempt from the ICFR auditor attestation
requirement.
---------------------------------------------------------------------------

    \422\ See McCallen et al. 2019 study, note 308 above.
---------------------------------------------------------------------------

    As in the case of audit fees, some of the affected issuers are
expected to experience lower cost savings while others would experience
greater savings, depending on their individual circumstances. For
example, we noted in the Proposing Release that some issuers had
reported potential cost savings other than audit fees ranging from
about $110,000 to about $350,000.\423\ While commenters to the
Proposing Release generally did not separately break out these non-
audit costs, they reported total costs including audit fees but also
internal labor and consultant costs ranging from $40,000 to over $2
million, though, as noted above, some include one-time start-up costs
as well as ongoing annual costs, and the largest estimate includes
costs attributable to SOX Section 404(a) and other SOX
requirements.\424\
---------------------------------------------------------------------------

    \423\ See note 211 of the Proposing Release, note 4 above.
    \424\ See letters from Cerecor, Guaranty, Pieris, Syros, and
Terra Tech, as discussed in more detail in above note 414. See also
Ardelyx Presentation, citing the BIO Study, note 69 above.
---------------------------------------------------------------------------

e. Implications of the Cost Savings
    While we estimate the average compliance cost associated with the
ICFR auditor attestation requirement for the affected issuers, it is
more difficult to discern whether incurring the costs of this
requirement represents the most effective use of funds for these
issuers. As discussed in Section IV.C.3.c. below, issuers for whom the
requirement is eliminated may determine that it is worthwhile to use
these funds to voluntarily undergo an audit of ICFR.\425\
Alternatively, some of these issuers could directly invest the
compliance cost savings in improving their

operations and prospects for growth, or in their control systems.
---------------------------------------------------------------------------

    \425\ See letter from BIO (supporting allowing ``issuers and
their investors the flexibility to determine for themselves whether
Section 404(b) is relevant to their business'').
---------------------------------------------------------------------------

    In total, we estimate an average cost savings of $210,000 per
issuer per year, with some of the affected issuers experiencing lesser
or greater savings.\426\ While a few commenters noted that ICFR auditor
attestations have become less expensive over time \427\ or that they
should already be less expensive for the affected issuers due to the
ability to scale the audit of ICFR,\428\ we note that our analysis,
using only recent years of data and low-revenue issuers, is intended to
capture any such effects.
---------------------------------------------------------------------------

    \426\ As noted above, this estimate is not intended to apply to
affected issuers that would not otherwise be subject to the ICFR
auditor attestation requirement (i.e., EGCs) or that would remain
subject to the FDIC auditor attestation requirement (i.e., banks
with assets of over $1 billion).
    \427\ See, e.g., letters from CFA Inst. and Deloitte.
    \428\ See letter from CFA.
---------------------------------------------------------------------------

    Several commenters argued that these cost savings are economically
small.\429\ In particular, they estimated that the savings represent
0.5 percent of the average affected issuer's revenue and 0.1 percent of
its market value.\430\ Similarly, many commenters asserted that the
proposed amendments would not enhance capital formation--and some
indicated they could even reduce capital formation.\431\ Others noted
that, in general, the costs of the ICFR auditor attestation requirement
are substantial,\432\ and that by eliminating the requirement for
certain issuers, the proposed amendments would enhance capital
formation or allow those issuers to preserve capital.\433\ We continue
to believe that the average expected savings is likely, in many cases,
to represent a meaningful cost savings for issuers with less than $100
million in revenue and may thus have beneficial economic effects on
competition and capital formation.
---------------------------------------------------------------------------

    \429\ See, e.g., letters from CFA, CFA Inst., CII, and Prof.
Barth et al.
    \430\ We obtain similar estimates. Specifically, we estimate
that the annual savings represents of 0.7 percent of the median
revenue and 0.1 percent of the median market capitalization of the
affected issuers that would be newly exempt from all ICFR auditor
attestation requirements. We note, however, that 12 percent of these
issuers have zero revenues, and that the savings are estimated for a
single year while market capitalization incorporates expectations
regarding all future years of performance.
    \431\ See, e.g., letters from Better Markets, CII, CFA, and
Prof. Ge et al. See also CFA Inst. (stating that the Proposing
Release, note 4 above, does not demonstrate that eliminating the
ICFR auditor attestation requirement would enhance capital
formation).
    \432\ See, e.g., letters from BIO, Broadmark, Carver, Guaranty,
ICBA, MSB, SSB, and Syros.
    \433\ See, e.g., letters from Andersen, CLSA, Concert, ICBA, and
NASBA.
---------------------------------------------------------------------------

    In particular, while the average annual cost savings may represent
a small percentage of the average affected issuers' revenues and market
capitalizations, it is significant relative to the income and cash
flows of these issuers. As noted in the Proposing Release, low-revenue
issuers are likely to face financing constraints because they do not
have access to internally-generated capital.\434\ A majority of the
affected issuers that will be newly exempt from the ICFR auditor
attestation requirement, and that will not be subject to the FDIC
auditor attestation requirement, have negative net income and negative
net cash flows from operations.\435\ In the absence of significant
income generation, the average savings of $210,000 per year may be
likely to be put to productive use,\436\ such as towards capital
investments, which would enhance capital formation. A number of issuers
commented that they anticipated that the savings would allow for
increased investment in their core business.\437\ Also, while some
issuers may experience lesser savings, some commented that they expect
to experience substantially greater savings,\438\ so the cost savings
are likely to be significant for some, even if not all, of the affected
issuers.
---------------------------------------------------------------------------

    \434\ For example, the Proposing Release, note 4 above, cited
one commenter that indicated that ``pre-revenue small businesses
utilize only investment dollars to fund their work'' and that any
cost savings thus ``could lead to funding for a new life-saving
medicine.'' See note 213 of the Proposing Release, note 4 above.
    \435\ See note 362 above.
    \436\ For example, in a survey of issuers in the biotech
industry, among 11 biotech EGCs that responded to a question
regarding how an extension of the exemption from the ICFR auditor
attestation requirement would affect them given the costs associated
with the requirement, eight out of the 11 issuers indicated that
they expected a positive impact on investments in research and
development and six out of the 11 issuers indicated that they
expected a positive impact on hiring employees. See BIO Study, note
69 above.
    \437\ See, e.g., letters from Cerecor, Concert, Guaranty, Pieris
and Syros.
    \438\ See, e.g., letters from Cerecor, Corvus, and Terratech,
estimating savings of $1 to $2 million.
---------------------------------------------------------------------------

    Further, several commenters cited fixed costs of compliance that do
not scale with size.\439\ Because of the fixed costs component of
compliance costs, smaller issuers generally bear proportionately higher
compliance costs than larger issuers.\440\ To illustrate this
disparity, we estimated in the Proposing Release that total audit fees
represent about 22 percent of revenues on average for accelerated
filers with less than $100 million in revenues, versus 0.5 percent of
revenue for those above $100 million in revenues.\441\ Reducing the
affected issuers' costs would reduce their overhead expenses and may
enhance their ability to compete with larger issuers.
---------------------------------------------------------------------------

    \439\ See letters from ASA, Broadmark, Chamber, and Guaranty.
    \440\ While it is difficult to identify the specific source of
the fixed component of compliance costs, there is empirical evidence
of such fixed costs based on differences in the ratio of such costs
to measures of issuer size across issuer size categories. For
example, the ratio of the costs for accelerated filers of complying
with Section 404 to the book value of the issuer's assets decreases
with issuer size. See, e.g., Figure 1 of Alexander et al. 2013
Study, note 401 above. There is evidence of some such fixed costs
persisting even after the 2007 change in the ICFR auditing standard
facilitating the scaling of an audit of ICFR, as demonstrated by the
results in the cited figure for issuers that had been complying with
Section 404(b) for five years (as observations in the figure
pertaining to lesser years of experience may include costs
experienced by some issuers in years prior to the 2007 changes).
    \441\ See Section III.C.2.d. of the Proposing Release, note 4
above.
---------------------------------------------------------------------------

    The alleviation of these costs could be a positive factor in the
decision of additional companies to enter public markets.\442\ That is,
if future compliance costs associated with ICFR auditor attestations
weigh against these companies becoming publicly traded, reducing these
expected future costs may enhance capital formation in the public
markets and the efficient allocation of capital at the market level. As
noted above, the expected compliance cost savings are likely to vary
across issuers. The amendments may be most likely to influence the
decision to enter the public markets for companies that anticipate
particularly high costs to obtain an ICFR auditor attestation and that
expect low levels of revenue to persist for many years into the future.
---------------------------------------------------------------------------

    \442\ See, e.g., letter from ICBA.
---------------------------------------------------------------------------

    Some commenters suggested that the amendments would encourage
companies to enter the public markets.\443\ On the other hand, other
commenters maintained that the ICFR auditor attestation requirement
does not prevent companies from entering the public markets.\444\
---------------------------------------------------------------------------

    \443\ See, e.g., letters from AdvaMed, AdvaMed et al.,
Broadmark, Cerecor, and ICBA.
    \444\ See, e.g., letters from CFA, CFA Inst., CII, and Crowe.
---------------------------------------------------------------------------

    Research investigating the link between SOX and companies exiting
or choosing not to enter public markets has been inconclusive.\445\ We
agree with commenters who stated that a number of other factors have
been associated

with the decline in listings.\446\ Further, newly public issuers can
already avail themselves of an exemption from the ICFR auditor
attestation requirement for at least one and generally up to five years
after their IPO.\447\ While the amendments could be a positive factor
in the decision of additional companies to enter public markets, it may
not be the decisive factor, and the direct impact of the amendments on
the number of publicly traded companies may be limited to the extent
that companies may be more focused on other factors associated with the
decision to go public.
---------------------------------------------------------------------------

    \445\ There is some evidence of a decreased rate of IPOs and an
increased rate of going private transactions and deregistrations in
the United States after SOX. However, it is unclear to what extent
these changes can be attributed to SOX (or to the auditor
attestation requirement in particular) versus other factors, and to
what extent these changes are a cause for concern. See e.g., Coates
and Srinivasan 2014 Study, note 369 above, at 636-640 (summarizing a
number of studies in this area).
    \446\ See, e.g., letters from CFA, CFA Inst., CII, and Crowe.
Other factors commenters cited include the expansion of exemptions
to registration that increase companies' ability to raise funds
privately, see, e.g., letters from CFA, CII, and Crowe; corporate
consolidations, see, e.g., letters from CFA and CII; market
conditions, see letter from CFA; and the general regulatory
environment, see letter from Crowe.
    \447\ See note 11 above regarding the exemption of EGCs from the
auditor attestation requirement.
---------------------------------------------------------------------------

3. Potential Costs of Expanding the Exemption From the ICFR Auditor
Attestation Requirement for Affected Issuers
    Exempting the affected issuers from the ICFR auditor attestation
requirement may result, over time, in management at this category of
issuers being less likely to maintain effective ICFR, which in turn may
result in less reliable financial statements, on average, for these
issuers. The discussion below explores this potential effect and its
implications in detail. We also consider two mitigating factors that
could be associated with the affected issuers on average, though we
acknowledge that they may not apply equally to all of the affected
issuers. First, low-revenue issuers may, on average, be less
susceptible to the risk of certain kinds of misstatements, such as
errors associated with revenue recognition.\448\ Second, in many cases,
the market value of such issuers may be driven to a greater degree by
their future prospects than by the current period's financial
statements, which may affect how, on average, investors use these
issuers' financial statements. This discussion is focused on affected
issuers that will be newly exempt from the ICFR auditor attestation
requirement and will not be subject to the FDIC auditor attestation
requirement.
---------------------------------------------------------------------------

    \448\ See BIO Study, note 69 above (finding that biotechnology
EGCs have lower restatement frequencies than other issuers, after
controlling for other factors, and attributing this to their
``absence of product revenue'' based on findings that revenue
recognition is one of the most frequent drivers of financial
restatements).
---------------------------------------------------------------------------

    Exempting the affected issuers from the ICFR auditor attestation
requirement could also increase the risk that material weaknesses in
ICFR may not be detected and disclosed, and thereby reduce the
information available to investors for gauging the reliability of these
issuers' financial statements. In this regard, we also discuss below
the potential effects related to the identification and disclosure of
material weaknesses in ICFR at the affected issuers. However, given the
size of the estimated effect as well as recent findings discussed in
Section IV.C.3.a. below on how ICFR auditor attestations may provide
limited information about the risk of future restatements,\449\ we
believe that any such effect would not significantly affect investors'
overall ability to make informed investment decisions.
---------------------------------------------------------------------------

    \449\ See notes 453 through 459 below and accompanying text.
---------------------------------------------------------------------------

a. Broad Considerations and Evidence Regarding the Effects of ICFR
Auditor Attestations on Financial Reporting
    This section summarizes a number of broad economic considerations
related to the possible effects of an ICFR auditor attestation
requirement on financial reporting in order to provide context for the
more detailed analysis of the costs of exempting the affected parties
from this requirement that follows. As discussed below, the anticipated
effects of changes to the population of issuers subject to the ICFR
auditor attestation requirement will depend on the characteristics of
the specific group of issuers that will be affected. In this regard we
note that prior research has not focused on the effects of the ICFR
auditor attestation requirement on low-revenue issuers in particular.
As discussed in Section IV.B.1., there also have been significant
changes over time in the implementation of the ICFR auditor attestation
requirement, the standards applying to a financial statement audit even
in the absence of an audit of ICFR, and the execution of audits of
financial statements and of ICFR, which may have had the effect of
reducing both the incremental costs and incremental benefits of an ICFR
auditor attestation since the periods studied in much of the existing
research. We therefore acknowledge that, while we believe that
consideration of the past research is an important part of our
analysis, these factors limit our ability to rely on the findings of
past research to predict how the amendments would affect the particular
class of issuers implicated by this rulemaking.
    ICFR auditor attestations can have two primary types of benefits.
First, the ICFR auditor attestation reports can provide incremental
information to investors about the reliability of the financial
statements. Second, the reliability of the financial statements can be
enhanced. That is, the expectation of, or process involved in, the ICFR
auditor attestation could lead issuers to maintain better controls,
which could lead to more reliable financial reporting. Importantly for
our evaluation of these possible benefits, however, we do not directly
observe the effectiveness of ICFR and the reliability of financial
statements, but only the associated disclosures by issuers. For
example, while restatements may indicate that controls have failed,
such restatements are often predicated on the underlying misstatements
being detected. Given such limitations with the available data, the
analysis in existing studies and in this release is necessarily less
than definitive.
    Regarding the first possible benefit of ICFR auditor attestations,
academic research provides some evidence that ICFR auditor attestation
reports contain information about the reliability of financial
statements, but also demonstrates that the incremental information
provided by these reports may be limited. The 2011 SEC Staff Study
summarizes evidence that ICFR auditor attestations generally resulted
in the identification and disclosure of material weaknesses that were
not previously identified or whose severity was misclassified when
identified by management in its assessment of ICFR, and that investor
risk assessments and investment decisions were associated with the
findings in auditor attestation reports.\450\ As noted by a
commenter,\451\ various survey results are also supportive of these
reports being informative to investors.\452\
---------------------------------------------------------------------------

    \450\ See 2011 SEC Staff Study, note 198 above, at 97-99 and
102-104. See also Coates and Srinivasan 2014 Study, note 369 above.
    \451\ See letter from CII.
    \452\ See Lawrence Brown, Andrew Call, Michael Clement, and
Nathan Sharp, The Activities of Buy-Side Analysts and the
Determinants of their Stock Recommendations, 62 J. of Acct. and
Econ. 139 (2016) (finding, in a survey of buy-side analysts, that 60
percent responded that material weaknesses in ICFR are definitely a
red flag of management potentially misrepresenting financial
results, and that the existence of a material weakness in ICFR was
the most cited red flag for misrepresentation followed by weak
corporate governance; however, this survey did not differentiate
between firms subject or not subject to the ICFR auditor attestation
requirement).
---------------------------------------------------------------------------

    However, more recent studies have found that auditor identification
of material weaknesses in ICFR tends to be concurrent with the
disclosure of restatements, rather than providing advance warning of
the potential for

restatements.\453\ While these findings do not imply that ICFR auditor
attestation reports fail to provide any useful information about the
risk of future restatements,\454\ they demonstrate that this
information may be limited. Further, researchers have been able to
predict the identification by auditors of material weaknesses in ICFR
beyond those identified by management, to some extent, by using
otherwise available information about issuers beyond current
restatements, such as their institutional ownership, aggregate losses,
past restatements, and late filings.\455\ One commenter notes that this
predictability does not imply that there is limited incremental
information provided by ICFR auditor attestation reports, as their
analysis suggests that investors are not able to fully discern
misreporting by issuers about their ICFR.\456\ Still, we believe that
the evidence suggests that markets at least partially, though perhaps
not fully, incorporate this information even in the absence of an ICFR
auditor attestation.\457\ Limitations to the incremental information
provided by ICFR auditor attestation reports about the risk of future
restatements may result from disincentives, such as the increased risk
of litigation and greater likelihood of management and auditor turnover
that have been associated with earlier material weakness disclosures,
for issuers and their auditors to disclose material weaknesses in the
absence of restatements.\458\ It may also result from issues with the
quality of the audit of ICFR. In this regard, researchers have found
that PCAOB scrutiny of these audits has been associated with a slightly
higher rate of identification of material weaknesses in ICFR prior to a
later restatement.\459\
---------------------------------------------------------------------------

    \453\ See, e.g., Sarah Rice & David Weber, How Effective is
Internal Control Reporting under SOX 404? Determinants of the (Non-
)Disclosure of Existing Material Weaknesses, 50(3) J. of Acct. Res.
811 (2012); William Kinney, Roger Martin, & Marcy Shepardson,
Reflections on a Decade of SOX 404(b) Audit Production and
Alternatives, 27(4) Acct. Horizons 799 (2013); and Daniel Aobdia,
Preeti Choudhary, & Gil Sadka, Do Auditors Correctly Identify and
Assess Internal Control Deficiencies? Evidence from the PCAOB Data,
Working Paper (2018), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2838896. See also Kinney and Shepardson 2011
Study, note 404 above.
    \454\ See, e.g., 2011 SEC Staff Study, note 198 above, at 86
(citing evidence that while both issuers subject to SOX Section
404(b) as well as those only subject to SOX Section 404(a) often
report restatements despite previously reporting that their ICFR was
effective, such restatements were 46 percent higher among those
filing only SOX Section 404(a) reports). See also PCAOB Investor
Advisory Group, Report from the Working Group on the Investor Survey
(2015), available at https://pcaobus.org/News/Events/Documents/09092015_IAGMeeting/Investor_Survey_Slides.pdf (reporting survey
findings that 72 percent of institutional investors indicated that
they relied on ICFR auditor attestations either ``extensively'' or
``a good bit'').
    \455\ See, e.g., Ge et al. 2017 Study, note 393 above.
    \456\ See letter from Prof. Ge et al.
    \457\ See, e.g., H. Ashbaugh-Skaife, D. Collins, W. Kinney, & R.
LaFond, The Effect of SOX Internal Control Deficiencies on Firm Risk
and Cost of Equity, 47(1) J. of Acct. Res. 1 (2009) (``Ashbaugh-
Skaife et al. 2009 Study'') (finding that companies that newly
disclose material weaknesses in their ICFR have an increase in their
cost of capital, but that this increase is lower for companies with
the characteristics most associated with having such material
weaknesses, i.e., those for which the market may be least surprised
by the disclosures, at about 50 basis points, and higher for
companies without such characteristics, at about 125 basis points).
    \458\ See Sarah Rice, David Weber, & Biyu Wu, Does SOX 404 Have
Teeth? Consequences of the Failure to Report Existing Internal
Control Weaknesses, 90(3) Acct. Rev. 1169 (2015). We note that
auditors have a duty to follow auditing standards and, if they do
not, face associated enforcement, inspection, reputation, and
litigation risks that provide a countervailing incentive.
    \459\ See, e.g., Defond and Lennox 2017 Study, note 307 above
(finding that PCAOB inspections may increase auditors' issuance of
adverse internal control opinions to clients with later
restatements; in particular, the study documents that in 2010, 96
percent of financial statements that were later restated were
accompanied by ICFR auditor attestations disclosing no material
weaknesses in ICFR, while this rate dropped to 91 percent by 2013).
---------------------------------------------------------------------------

    A further reason why ICFR auditor attestation reports may provide
only a weak warning about future restatements is that the audit of ICFR
may contribute to the avoidance of misstatements, leading us to observe
only the residual restatements where the misstatement risk was not
foreseen or a misstatement was not detected for reasons unrelated to
internal controls. Thus, the second possible benefit we consider is
that the audit of ICFR may encourage management to maintain more
effective controls and thereby deter accounting errors and fraud. The
academic research discussed below documents substantial evidence that
would be consistent with such effects, though, as is common in
financial economics, it is difficult to determine whether the
documented differences can be causally linked to the audit of
ICFR.\460\
---------------------------------------------------------------------------

    \460\ See Coates and Srinivasan 2014 Study, note 369 above, and
Leuz and Wysocki 2016 Study, note 396 above (both articles
discussing the limited ability to make causal attribution based on
research on the effects of the provisions of SOX, but also
highlighting the specific studies that can more plausibly make
causal claims). See also Report to Congress: Access to Capital and
Market Liquidity, August 2017 SEC Staff study 24-27 (discussing
similar limitations, in a different context, in the ability to make
causal inferences about the effects of regulation because of data
and experimental design issues), available at https://www.sec.gov/files/access-to-capital-and-market-liquidity-study-dera-2017.pdf.
---------------------------------------------------------------------------

    In particular, while issuers are subject to a number of
requirements discussed above that are intended to help to provide
adequate internal controls and reliable financial statements,\461\
studies have documented a significant association between audits of
ICFR and the maintenance of better internal controls. The 2011 SEC
Staff Study provides analysis and summarizes research indicating that
issuers that were not required to obtain an ICFR auditor attestation
disclosed ineffective ICFR at a greater rate than those that were
subject to such requirements,\462\ and newer studies demonstrate that
this difference has remained consistent in recent years.\463\ Further,
a recent paper finds that the ICFR auditor attestation requirement, but
not management ICFR reporting requirements alone, are associated with
enhanced quarterly earnings accrual quality, and argues that this is an
indication of the improved quality of internal controls.\464\ We note,
however, that this study finds that the improvements for issuers
subject to the ICFR auditor attestation requirement are attenuated
after the 2007 change in the ICFR auditing standard discussed in
Section IV.B.1. above.\465\ The ICFR auditor attestation requirement
has also been associated with a higher rate of remediation of material
weaknesses after they are disclosed.\466\ As noted by

a commenter,\467\ survey evidence is also consistent with this
requirement being associated with more effective ICFR. For example,
this commenter cites a recent survey of public companies that found
that 57 percent responded that one of the primary benefits of the ICFR
auditor attestation requirement was ``improved internal control over
financial reporting (ICFR) structure.'' \468\
---------------------------------------------------------------------------

    \461\ See Section IV.B.1. above.
    \462\ See 2011 SEC Staff Study, note 198 above, at 41 and 86-87.
The rate of ineffective ICFR is based on the findings of management
reports on ICFR pursuant to SOX Section 404(a). Because auditor
attestations of ICFR are associated with an increased detection and
disclosure of material weaknesses, as discussed above, the rate of
ineffective ICFR reported by issuers not subject to the auditor
attestation requirement may be understated, which would result in
this difference also being understated.
    \463\ See, e.g., Audit Analytics, SOX 404 Disclosures: A
Fourteen Year Review (Sept. 2018) (``2018 Audit Analytics Study''),
available at www.auditanalytics.com/blog/sox-404-disclosures-a-fourteen-year-review/.
    \464\ See Schroeder and Shepardson 2016 Study, note 305 above
(using quarterly accruals quality, measured by the level of
quarterly discretionary working capital accruals and the quarterly
accrual estimation error, as a proxy for internal control quality
based on the argument that internal control improvements should be
exhibited in unaudited financial reports).
    \465\ Id.
    \466\ See Vishal Munsif & Meghna Singhvi, Internal Control
Reporting and Audit Fees of Non-Accelerated Filers, 15(4) J. of
Acct., Ethics & Pub. Pol'y 902 at 915 (2014) (finding that 49 out of
160, or 30 percent, of non-accelerated filers that disclosed a
material weakness in 2008 reported no material weaknesses in 2009,
in contrast to 64 out of 83, or 77 percent, of accelerated filers in
a similar situation). See also Jacqueline Hammersley, Linda Myers, &
Jian Zhou, The Failure to Remediate Previously Disclosed Material
Weaknesses in Internal Controls, 31(2) Auditing: J. Prac. & Theory
73 (2012); and Karla Johnstone, Chan Li, & Kathleen Rupley, Changes
in Corporate Governance Associated with the Revelation of Internal
Control Material Weaknesses and their Subsequent Remediation, 28(1)
Contemp. Acct. Res. 331 (2011) (both finding a similar rate of
remediation for accelerated filers for an earlier sample period).
    \467\ See letter from CII.
    \468\ Id. See also Benchmarking SOX Costs, Hours and Controls,
Protiviti (June 24, 2019), available at https://www.protiviti.com/sites/default/files/united_states/insights/2019_sarbanes_oxley_compliance_surveyprotiviti.pdf.
---------------------------------------------------------------------------

    To the extent that the ICFR auditor attestation requirement leads
to more effective ICFR, this requirement may thereby lead to more
reliable financial statements. Some studies have found that a failure
to maintain effective ICFR has been associated with a higher rate of
future restatements and lower earnings quality,\469\ a higher rate of
future fraud revelations,\470\ more profitable insider trading,\471\
and less accurate analyst forecasts.\472\
---------------------------------------------------------------------------

    \469\ See Coates and Srinivasan 2014 Study, note 369 above, at
649-650.
    \470\ See Dain Donelson, Matthew Ege, & John McInnis, Internal
Control Weaknesses and Financial Reporting Fraud, 36(3) Auditing: A
J. of Prac. and Theory 45 (2017) (``Donelson et al. 2017 Study'')
(finding that issuers with a material weakness in ICFR are 1.24
percentage points more likely to have a fraud revelation within the
next three years compared to issuers without a material weakness,
relative to a 1.60 percent unconditional probability of fraud).
    \471\ See Hollis Asbhaugh-Skaife, David Veenman, & Daniel
Wangerin, Internal Control over Financial Reporting and Managerial
Rent Extraction: Evidence from the Profitability of Insider Trading,
55(1) J. of Acct. and Econ. 91 (2013).
    \472\ See, e.g., Sarah Clinton, Arianna Pinello, & Hollis
Skaife, The Implications of Ineffective Internal Control and SOX 404
Reporting for Financial Analysts, 33(4) J. of Acct. and Pub. Pol'y
303 (2014).
---------------------------------------------------------------------------

    Generally, ICFR auditor attestations also have been found to be
directly associated with financial statements that are more reliable
than in the absence of these attestations.\473\ We note, however, that
two recent studies, using different methodologies, find evidence that
conflicts with these other studies. In particular, the evidence in
these studies, which use data from 2007 through 2013 \474\ and
2014,\475\ respectively, does not support the conclusion that the ICFR
auditor attestation requirement is associated with more reliable
financial statements, and one of the studies \476\ even finds an
association with lower reliability, consistent with concerns discussed
in Section IV.B.1. above that the quality of audits of ICFR dropped at
least temporarily after 2007.
---------------------------------------------------------------------------

    \473\ See 2011 SEC Staff Study, note 198 above, at 98-100. For
more recent evidence, see, e.g., Yuping Zhao, Jean Bedard, & Rani
Hoitash, SOX 404, Auditor Effort, and the Prevention of Financial
Report Misstatements, 36(4) Auditing: A J. of Prac. & Theory 151
(2017); and Lucy Chen, Jayanthi Krishnan, Heibatollah Sami, & Haiyan
Zhou, Auditor Attestation under SOX Section 404 and Earnings
Informativeness, 32(1) Auditing: A J. of Prac. & Theory 61 (2013).
    \474\ See Bhaskar et al. 2018 Study, note 305 above (finding
that, among companies with less than $150 million in market
capitalization, those providing auditor attestations of ICFR,
whether voluntarily or because they are accelerated filers, had a
higher rate of material misstatements and lower earnings quality
than others in this category in the period from 2007 through 2013).
    \475\ See McCallen et al. 2019 Study, note 308 above (finding
that, among companies with close to $75 million in public float,
those above this threshold, which are likely subject to the ICFR
auditor attestation requirement, do not experience lower
restatements than those below this threshold in the period from 2007
through 2015).
    \476\ See Bhaskar et al. 2018 Study, note 305 above.
---------------------------------------------------------------------------

    To evaluate the economic implications of any effects the ICFR
auditor attestation requirement has on ICFR and financial statements,
we can consider factors such as production or investment at the issuer
or market level. For example, at the issuer level, more reliable
disclosures are generally expected, based on economic theory, to lead
investors to demand a lower expected return to hold an issuer's
securities (i.e., a lower cost of capital).\477\ A lower cost of
capital may enhance capital formation by encouraging issuers to issue
additional securities in order to raise funds for new investments.
Empirically, material weaknesses in ICFR,\478\ restatements,\479\ and
low earnings quality \480\ have all been associated with a higher cost
of debt or equity \481\ capital.
---------------------------------------------------------------------------

    \477\ See, e.g., Douglas Diamond & Robert Verrecchia,
Disclosure, Liquidity, and the Cost of Capital, 46(4) J. of Fin.
1325 (1991) (``Diamond and Verrecchia 1991 Study''); David Easley &
Maureen O'Hara, `Information and the Cost of Capital,' 59(4) J. of
Fin. 1553 (2004); Richard Lambert, Christian Leuz, & Robert
Verrecchia, Accounting Information, Disclosure, and the Cost of
Capital,'' 45(2) J. of Acct. Res. 385 (2007); and Christopher
Armstrong, John Core, Daniel Taylor, & Robert Verrecchia, When Does
Information Asymmetry Affect the Cost of Capital? 49(1) J. of Acct.
Res. 1 (2011). We note that these articles also detail limited
theoretical circumstances under which more reliable disclosures
could lead to a higher cost of capital, such as in the case where
improved disclosure is sufficient to reduce incentives for market
making.
    \478\ See, e.g., Dragon Tang, Feng Tian, & Hong Yan, Internal
Control Quality and Credit Default Swap Spreads, 29(3) Acct.
Horizons 603 (2015); Lawrence Gordon & Amanda Wilford, An Analysis
of Multiple Consecutive Years of Material Weaknesses in Internal
Control, 87(6) Acct. Rev. 2027 (2012) (``Gordon and Wilford 2012
Study''); and Ashbaugh-Skaife et al. 2009 Study, note 457 above. We
note that earlier work did not detect an association between SOX
Section 404 material weaknesses and the equity cost of capital. See,
e.g., M. Ogneva, K. R. Subramanyam, & K. Rachunandan, Internal
Control Weakness and Cost of Equity: Evidence from SOX Section 404
Disclosures, 82(5) Acct. Rev. 1255 (2007) (``Ogneva et al. 2007
Study''). See also 2011 SEC Staff Study, note 198 above, at 101-102.
    \479\ See, e.g., Paul Hribar & Nicole Jenkins, The Effect of
Accounting Restatements on Earnings Revisions and the Estimated Cost
of Capital, 9 Rev. of Acct. Stud. 337 (2004) (``Hribar and Jenkins
2004 Study'').
    \480\ See, e.g., Jennifer Francis, Ryan LaFond, Per M. Olsson, &
Katherine Schipper, Cost of Equity and Earnings Attributes, 79(4)
Acct. Rev. 967 (2004) (``Francis et al. 2004 Study'').
    \481\ We note that empirical studies of the cost of equity
capital face particular challenges in accurately measuring the cost
of equity capital, which can reduce their reliability, but that this
is mitigated in studies that look at changes over time, see, e.g.,
Gordon and Wilford 2012 Study, note 478 above; Ashbaugh-Skaife et
al. 2009 Study, note 457 above; and Hribar and Jenkins 2004 Study,
note 479 above, rather than in the cross-section. See, e.g., Ogneva
et al. 2007 Study, note 478 above, and Francis et al. 2004 Study,
note 480 above. See also, e.g., Stephannie Larocque & Matthew R.
Lyle, Implied Cost of Equity Capital Estimates as Predictors of
Accounting Returns and Stock Returns, 2(1) J. of Fin. Rep. 69 (2017)
(discussing concerns about measures of the cost of equity capital);
and Charles M. C. Lee, Eric C. So, & Charles C. Y. Wang, Evaluating
Firm-Level Expected-Return Proxies, Harvard Business School Working
Paper 15-022 (2017) (finding that ``in the vast majority of research
settings, biases in [equity cost of capital measures] are
irrelevant'' and that the cost of equity capital measures used in
the accounting literature ``are particularly useful in tracking
time-series variations in expected returns'').
---------------------------------------------------------------------------

    More effective ICFR and more reliable financial reporting may also
lead to improved efficiency of production if managers themselves
thereby have access to more reliable data that facilitates better
operating and investing decisions.\482\ For example, one study finds
that the investment efficiency of issuers improves, in that both under-
investment and over-investment are curtailed, after the disclosure and
remediation of material weaknesses.\483\ Another study finds that
issuers that remediate material weaknesses in ICFR that are related to
inventory tracking thereafter experience higher inventory turnover,
together with improvements in sales and profitability.\484\ That said,
it is difficult to generalize the results

beyond these samples to determine whether non-remediating issuers or
issuers with different types of material weaknesses in ICFR could
expect similar operational benefits from remediation. The ICFR auditor
attestation requirement may also result in benefits at the market
level, though these are more difficult to measure than those at the
issuer level.\485\ The potential for market-level impact is largely
driven by network effects (which are associated with the broad adoption
of practices) and by other externalities (i.e., spillover effects on
issuers or parties beyond the issuer in question). For example, to the
extent that the ICFR auditor attestation requirement leads to more
reliable financial statements at a large number of issuers, it may lead
to a more efficient allocation of capital across different investment
opportunities at the market level.\486\ The ICFR auditor attestation
requirement also can enhance capital formation to the extent that it
improves overall investor confidence, for which there is some
suggestive evidence,\487\ and thus encourages investment in public
markets.\488\
---------------------------------------------------------------------------

    \482\ See, e.g., Ge et al. 2017 Study at 359, note 393 above
(arguing that internal control misreporting leads to lower operating
performance due to the non-remediation of ineffective controls, and
estimating the degree of such underperformance based on the
improvement shown by issuers that are non-accelerated filers after
disclosing and remediating material weaknesses, relative to other
such issuers that are suspected of having unreported material
weaknesses).
    \483\ See Mei Cheng, Dan Dhaliwal, & Yuan Zheng, Does Investment
Efficiency Improve After the Disclosure of Material Weaknesses in
Internal Control over Financial Reporting?, 56(1) J. of Acct. and
Econ. 1 (2013).
    \484\ See Mei Feng, Chan Li, Sarah McVay, & Hollis Skaife, Does
Ineffective Internal Control Over Financial Reporting Affect a
Firm's Operations? Evidence From Firms' Inventory Management,''
90(2) Acct. Rev., 529 (2015) (``Feng et al. 2015 Study'').
    \485\ See, e.g., Leuz and Wysocki 2016 Study, note 396 above
(stating that researchers ``generally lack evidence on market-wide
effects and externalities from regulation, yet such evidence is
central to the economic justification of regulation'' and
acknowledging that ``the identification of such market-wide effects
and externalities is even more difficult than the identification of
direct economic consequences on individual firms'').
    \486\ There is also some evidence that more reliable financial
disclosures also facilitate a more effective market for corporate
control, which can increase overall market discipline and thus
enhance the efficiency of production by incentivizing more effective
management. See Amir Amel-Zadeh & Yuan Zhang, The Economic
Consequences of Financial Restatements: Evidence from the Market for
Corporate Control, 90(1) Acct. Rev. 1 (2015). See also Vidhi
Chhaochharia, Clemens Otto, & Vikrant Vig, The Unintended Effects of
the Sarbanes-Oxley Act, 167(1) J. of Institutional and Theoretical
Econ. 149 (2011).
    \487\ See, e.g., 2013 GAO Study, note 297246 above (finding that
52 percent of the companies surveyed reported greater confidence in
the financial reports of other companies due to the ICFR auditor
attestation requirement; in contrast, 30 percent of the respondents
reported that they believed this requirement raised investor
confidence in their own company).
    \488\ For a further discussion of potential externalities, see
Coates and Srinivasan 2014 Study, note 369 above, at 657-659.
---------------------------------------------------------------------------

    Many commenters cited the benefits that have been ascribed to the
ICFR auditor attestation requirement in general and attested to their
importance. For example, some stated that the ICFR auditor attestation
requirement promotes more effective ICFR and more accurate ICFR
disclosures,\489\ including a greater likelihood and timeliness of
disclosing ineffective or weak ICFR,\490\ and that effective ICFR leads
to better and more reliable financial statements,\491\ audit
quality,\492\ and analyst forecasts \493\ as well as fewer
restatements, misstatements,\494\ and instances of fraud and insider
trading.\495\ Others more directly linked the ICFR auditor attestation
requirement with enhanced transparency,\496\ a higher quality and
reliability of issuers' financial statements,\497\ and corporate
governance \498\ and a reduced number of restatements,
misstatements,\499\ and instances of fraud.\500\ Some commenters noted
that the ICFR auditor attestation requirement increases investor
confidence generally \501\ and that investors view the requirement as
beneficial.\502\
---------------------------------------------------------------------------

    \489\ See, e.g., letters from Better Markets, CFA, CII, Crowe,
Grant Thornton, Prof. Barth et al., and PWC.
    \490\ See, e.g., letters from Better Markets, CFA, Crowe, and
Prof. Barth et al.
    \491\ See, e.g., letters from CAQ, CFA, CII, and Grant Thornton.
    \492\ See, e.g., letter from CAQ.
    \493\ See, e.g., letter from CFA.
    \494\ See, e.g., letters from CAQ and CFA.
    \495\ See, e.g., letter from CFA.
    \496\ See, e.g., letter from EY.
    \497\ See, e.g., letters from Better Markets, CFA, CII,
Deloitte, EY, Grant Thornton, PWC, and RSM.
    \498\ See, e.g., letter from Deloitte.
    \499\ See, e.g., letters from CAQ, CFA Inst., Crowe, Deloitte,
EY, Grant Thornton, and Prof. Barth et al.
    \500\ See, e.g., letters from Better Markets and Deloitte.
    \501\ See, e.g., letters from Better Markets, CAQ, CFA, and EY.
    \502\ See, e.g., letters from CII, CFA Inst., and EY.
---------------------------------------------------------------------------

    Importantly, all of these benefits, at both the issuer and market
level, likely vary across issuers of different types. For example,
younger, loss-incurring issuers with lower market capitalization and
lower institutional ownership, as well as those with more segments,
tend to be more likely to newly disclose material weaknesses as they
transition into the ICFR auditor attestation requirement.\503\ However,
the market appears to account for the association of material
weaknesses with these and other observable issuer characteristics.
Thus, issuers that have the characteristics associated with a higher
rate of material weaknesses (and which investors may therefore value
under the assumption that they are likely to have ineffective ICFR) but
that receive an auditor attestation report that does not report any
material weaknesses are found to have the greatest cost of capital
benefit from such a report.\504\ Small, loss-incurring issuers are also
disproportionately represented amongst issuers that have allegedly
engaged in financial disclosure frauds, indicating that any benefits in
terms of investor protection and investor confidence may be
particularly important for this population of issuers.\505\ On the
other hand, marginal changes in the reliability of the financial
statements of issuers whose valuation is driven primarily by their
future prospects--which could also include small, loss-incurring
issuers--could have limited issuer- and market-level effects to the
extent that the current financial statements of these issuers are less
critical to assessing their valuation.\506\
---------------------------------------------------------------------------

    \503\ See Ge et al. 2017 Study, note 393 above (regarding the
term ``younger,'' this study defines company age as the number of
years a company has been covered in the Compustat database). See
also 2011 SEC Staff Study, note 198 above, at 96 (summarizing
previous research finding that internal control deficiencies are
associated with smaller, complex, riskier, and more financially-
distressed issuers).
    \504\ See Ashbaugh-Skaife et al. 2009 Study, note 457 above.
    \505\ See, e.g., COSO 2010 Fraud Study (finding that companies
allegedly engaging in financial disclosure fraud in the period from
1998 through 2007 had median assets and revenue under $100 million
and were often loss-incurring or close to breakeven) and
Characteristics of Financial Restatements and Frauds, CPA J. (Nov.
2017), available at www.cpajournal.com/2017/11/20/characteristics-financial-restatements-frauds/ (for more recent evidence).
    \506\ See, e.g., Patricia Dechow & Catherine Schrand, Earnings
Quality, Res. Found. of CFA Inst. 12 (2004) (``Dechow and Schrand
2004 Monograph'').
---------------------------------------------------------------------------

b. Estimated Effects on ICFR, the Reliability of Financial Statements,
and Potential Fraud
    The academic literature discussed in Section IV.C.3.a. above
suggests that the scrutiny associated with the ICFR auditor attestation
may lead issuers that are required to obtain this attestation to
maintain more effective ICFR and to remediate material weaknesses in
ICFR more quickly, leading to more reliable financial statements.
Further, as discussed above, studies have highlighted that smaller
issuers are disproportionately represented in populations of issuers
with ineffective ICFR and financial statements that require material
restatement. In addition, smaller issuers are less likely to have
significant external scrutiny in the form of analyst and media coverage
and monitoring by institutional owners,\507\ which could otherwise

provide another source of discipline to maintain the reliability of
financial statements. However, two of the studies cited above find that
the ICFR auditor attestation requirement was not associated with more
reliable financial statements for lower market capitalization issuers
from 2007 through 2013 or 2014,\508\ and the existing studies in
general may not be directly applicable to current circumstances given
the 2010 change in risk assessment auditing standards, the 2007 change
in the ICFR auditing standard and other recent changes discussed in
Section IV.B.1. above. Importantly, the existing literature and most of
the results cited by commenters regarding the benefits of the ICFR
auditor attestation also do not directly examine low-revenue issuers.
---------------------------------------------------------------------------

    \507\ See, e.g., Joel Peress & Lily Fang, Media Coverage and the
Cross-Section of Stock Returns, 64(5) J. of Fin. 2023 at 2030 (2009)
(finding that ``firm size has an overwhelming effect on media
coverage: large firms are much more likely to be covered''); Armando
Gomes, Gary Gorton, & Leonardo Madureira, SEC Regulation Fair
Disclosure, Information, and the Cost of Capital, 13 J. of Corp.
Fin. 300 at 307 (2007) (stating that ``there is overwhelming
evidence that size can explain analyst following''); and Eliezer
Fich, Jarrad Harford, & Anh Tran, Motivated Monitors: The Importance
of Institutional Investors' Portfolio Weights, 118(1) J. of Fin.
Econ. 21 (2015) (finding that institutional monitoring is greatest
when a company represents a significant allocation of funds in the
institution's portfolio, which is strongly associated with company
size).
    \508\ See Bhaskar et al. 2018 Study, note 305 above, as
discussed in note 474 above, and McCallen et al. 2019 Study, note
308 above, as discussed in note 475 above.
---------------------------------------------------------------------------

    This section therefore provides an analysis of low-revenue issuers
using recent data to complement the existing studies and better inform
our consideration of the possible costs of the amendments. However,
some uncertainty will remain due to the challenges discussed above in
measurement and in ascribing causality in any such analysis, the
limited sample sizes that result when restricting the analysis to
recent years, and the general difficulty of predicting how the parties
involved will react to the amendments. As discussed in more detail in
the Proposing Release,\509\ our analysis includes an examination of two
comparison populations of issuers that are not subject to the ICFR
auditor attestation requirement but that otherwise have similar
responsibilities with respect to ICFR (i.e., non-accelerated filers,
other than EGCs, and EGCs), with consideration given to the ways in
which these issuers differ from the affected issuers.
---------------------------------------------------------------------------

    \509\ See Sections III.C.2. and III.C.4. of the Proposing
Release, note 4 above.
---------------------------------------------------------------------------

    One commenter suggested that we should more carefully consider the
audit risks linked to specific industries that are expected to be
affected by the amendments, highlighting the banking industry as one
that may have special considerations.\510\ We note that, as discussed
above, the majority of the affected banking issuers are expected to
remain subject to the FDIC auditor attestation requirement and
therefore are not expected to be significantly affected by the
amendments. Further, because of the small sample of affected issuers,
we have a limited ability to split our sample and maintain statistical
reliability. However, our aggregate estimates should reflect the
overall diversity in the population of affected issuers.
---------------------------------------------------------------------------

    \510\ See letter from CFA Inst.
---------------------------------------------------------------------------

    Another commenter indicated that the primary quantifiable cost of
an exemption from the ICFR auditor attestation requirement stems from
misreporting regarding the effectiveness of ICFR.\511\ While we
consider this effect and its quantifiable implications in more detail
below, we continue to believe that the incentive provided by the ICFR
auditor attestation requirement to actually maintain better controls
(versus just to more accurately report their status) remains a key
benefit with certain quantifiable implications that could be lost due
to an exemption from this requirement.
---------------------------------------------------------------------------

    \511\ See letter from Prof. Ge et al.
---------------------------------------------------------------------------

i. Effects on the Prevalence of Ineffective ICFR
    We first consider possible effects related to the effectiveness of
the affected issuers' ICFR. In the Proposing Release, we presented an
analysis of the rate of ineffective ICFR from 2014-2018 among low-
revenue issuers that are subject to the ICFR auditor attestation
requirement compared to low-revenue issuers not subject to this
requirement.\512\ In particular, we compared the reported rate of
ineffective ICFR in these recent years for accelerated filers that are
subject to the ICFR auditor attestation requirement and have revenues
of less than $100 million, relative to the reported rate of ineffective
ICFR for issuers in our comparison populations (non-accelerated filers,
other than EGCs, and EGCs, neither of which is required to comply with
the ICFR auditor attestation requirement) that also have revenues of
less than $100 million. We focused on SOX Section 404(a) management
reports on ICFR, with the caveat that management may not report as many
material weaknesses in the absence of an audit of ICFR.\513\ Based on
this analysis, and with consideration for the difference in size,
maturity, and overall resources of the affected issuers versus the
comparison sample, we estimated that an additional 15 percent of the
affected issuers may fail to maintain effective ICFR.\514\ We did not
receive comment on this specific estimate or comments providing data or
methodologies that would improve our estimate. Our estimate is
consistent with the estimated effect on ICFR based on a study of
issuers transitioning into the ICFR auditor attestation
requirement.\515\ We do not expect the full estimated effect to be
experienced immediately upon effectiveness of the amendments. Instead,
as discussed in detail at the end of this section, we expect a movement
towards this higher rate of ineffective ICFR over time as some of the
affected issuers make incremental changes in their investment in ICFR
and as additional issuers enter the category of affected issuers.
---------------------------------------------------------------------------

    \512\ See Section III.C.4.b. of the Proposing Release, note 4
above.
    \513\ We separately consider this potential under-reporting of
material weaknesses in the analysis below.
    \514\ See Section III.C.4.b. of the Proposing Release, note 4
above. We also noted in this section of the Proposing Release, note
4 above, that our findings may not be surprising, as certain
material weaknesses in ICFR may be corrected by, for example, hiring
additional staff, which managers of an issuer that is not currently
producing much revenue may prefer to defer to a later time. Indeed,
about 80 to 85 percent of the low-revenue issuers reporting
ineffective ICFR in the comparison populations in 2017 reported at
least one staffing-related material weakness, though these were
generally accompanied by other types of material weaknesses. See
note 259 of the Proposing Release, note 4 above, and the
accompanying text.
    \515\ See Ge et al. 2017 Study, note 393 above, at 372 (finding
that 62.5 percent of companies that reported material weaknesses as
non-accelerated filers remediate such weaknesses upon entering
accelerated filer status). To compare the result from this study to
our estimate, note that we find in Table 7 above that about nine
percent of accelerated filers report ineffective ICFR (further, the
Proposing Release, note 4 above, found that the rate was similar for
low and high revenue issuers). Our estimate of an additional 15
percentage points of the affected issuers reporting ineffective ICFR
in the absence of an ICFR auditor attestation requirement would lead
to a total of 24 percent (nine percent plus 15 percent) of the
issuers reporting material weaknesses in ICFR in the absence of the
requirement as compared to nine percent reporting material
weaknesses in ICFR when subjected to the requirement. This is the
same result one would get by applying the 62.5 percent remediation
estimate from the cited study. In other words, if 62.5 percent of
the issuers reporting material weaknesses in the absence of the ICFR
auditor attestation requirement remediated their material weaknesses
upon entering accelerated filer status and becoming subject to the
requirement, that would mean that the rest of the issuers (37.5
percent) failed to remediate when becoming subject to the
requirement. This would imply that a 24 percent rate of ineffective
ICFR reported by the issuers in the absence of the requirement would
correspond to a nine percent rate (24 percent times 37.5 percent) of
ineffective ICFR reported by the issuers when subjected to the
requirement.
---------------------------------------------------------------------------

ii. Effects on the Detection and Disclosure of Material Weaknesses in
ICFR
    Because the previous analysis focuses on disclosed rates of
ineffective ICFR, it does not address the extent to which the
amendments may affect the detection and disclosure of material
weaknesses

in ICFR. As discussed in Section IV.C.3.a. above, studies have found
that audits of ICFR often result in the identification and disclosure
of material weaknesses that were not previously identified or whose
severity was misclassified in management's initial assessment. Thus,
extending the exemption from the ICFR auditor attestation requirement
to the affected issuers may decrease the likelihood that, when these
issuers have underlying material weaknesses in ICFR, these material
weaknesses are detected and disclosed.
    In the Proposing Release, we noted that low-revenue issuers may be
less likely than other issuers to fail to detect and disclose material
weaknesses in the absence of an ICFR auditor attestation, perhaps
because they have less complex financial systems and controls.\516\
Consistent with this hypothesis, we found that the low-revenue issuers
that are not subject to the ICFR auditor attestation requirement report
relatively high rates of ineffective ICFR despite these reports not
being subject to the additional scrutiny of an ICFR auditor
attestation.
---------------------------------------------------------------------------

    \516\ See 2017 SICPG Survey Report, note 419 above, at 6
(finding that 33 percent of survey respondents with revenues of $75
million or less reported that they manage no more than 100 total
controls, as compared to 13 percent of those with revenues of $76 to
$700 million and zero percent of those with revenues greater than
$700 million).
---------------------------------------------------------------------------

    In the Proposing Release, we did not quantitatively estimate a
potential effect on the detection and disclosure of material weaknesses
in ICFR, though we did qualitatively consider how the amendments could
affect issuers depending on their proclivity to detect and disclose
underlying material weaknesses in the absence of an ICFR auditor
attestation.\517\ Several commenters indicated that they expected the
amendments to affect the detection and disclosure of material
weaknesses in ICFR,\518\ with one stating that ``the primary
quantifiable cost of 404(b) attestation exemption arises from internal
control misreporting.'' \519\ Further, other commenters noted that
factors other than the complexity of issuers' systems and controls,
such as their accounting personnel resources \520\ or the intricacies
of the issuers' business and industry, the strength of their
governance, the competency of their management, and their international
reach,\521\ should be considered in assessing the risk of misreporting
with respect to ICFR effectiveness. In response to these comments, we
conducted a quantitative estimation of this effect and its potential
implications.
---------------------------------------------------------------------------

    \517\ See Section III.C.4.c of the Proposing Release, note 4
above.
    \518\ See, e.g., letters from CFA Inst., EY, and Prof. Ge et al.
    \519\ See letter from Prof. Ge et al.
    \520\ See letters from CAQ and EY.
    \521\ See letter from RSM.
---------------------------------------------------------------------------

    Because undetected and undisclosed material weaknesses cannot be
directly observed, we are not able to directly estimate the extent of
such issues in our comparison samples of low-revenue issuers that are
not subject to the ICFR auditor attestation requirement. Instead, we
rely on a recent study that estimates that an incremental 3.5 percent
of issuers misreport their ICFR as being effective when not subject to
the ICFR auditor attestation requirement as compared to when they are
subjected to this requirement.\522\ To obtain this estimate, the study
uses the characteristics associated with ineffective ICFR to predict
the actual rate of ineffective ICFR as opposed to the disclosed rate of
ineffective ICFR, and uses changes in reporting around transitions into
accelerated filer status to predict the proportion of suspected
misreporters that would correctly report under an ICFR auditor
attestation requirement.\523\
---------------------------------------------------------------------------

    \522\ See Ge et al. 2017 Study, note 393 above (estimating,
based on data from 2007 through 2014, that 9.3 percent of non-
accelerated filers incorrectly report their ICFR to be effective and
that 38.1 percent of these, or 3.5 percent, would correctly report
their ICFR to be ineffective if subjected to the ICFR auditor
attestation requirement).
    \523\ Id.
---------------------------------------------------------------------------

    We directly apply the results from the study and estimate that 3.5
percent of the affected issuers that will be newly exempt from all ICFR
auditor attestation requirements may misreport that their ICFR is
effective, but would not misreport if subjected to those requirements.
To be conservative, we do not adjust this estimate based on our
conjecture that low-revenue issuers may be less likely than other
issuers to fail to detect and disclose material weaknesses in the
absence of an ICFR auditor attestation, perhaps because they have less
complex financial systems and controls. However, we note that the
estimate may be somewhat inflated to the extent that this conjecture is
correct.
iii. Effects on Restatements
    We next consider the extent to which the possible effects on
reported and unreported material weaknesses in ICFR might translate
into less reliable financial statements. By definition, material
weaknesses represent a reasonable possibility that a material
misstatement of the issuer's financial statements will not be prevented
or detected on a timely basis,\524\ and as discussed above, existing
studies have demonstrated that ineffective ICFR are associated with
less reliable financial statements. Thus, our estimated increase in the
rate of ineffective ICFR likely would translate into a decrease in the
reliability of the financial statements of the affected issuers.
However, low-revenue issuers could be less susceptible, on average, to
at least certain kinds of misstatements. In particular, 10 to 20
percent of restatements and about 60 percent of the cases of financial
disclosure fraud in recent times have been associated with improper
revenue recognition,\525\ which is less of a risk, for example, for
issuers that currently have no revenues.
---------------------------------------------------------------------------

    \524\ See Regulation S-X Rule 1-02(a)(4).
    \525\ See Audit Analytics, 2017 Financial Restatements: A
Seventeen Year Comparison, (May 2018), available at https://blog.auditanalytics.com/2017-financial-restatements-review/, and
COSO 2010 Fraud Study, note 505 above.
---------------------------------------------------------------------------

    We explored this possibility empirically in the Proposing Release,
by comparing the percentage of issuers in different categories that
eventually restated some of the financial statements that they reported
for a given year, for the years 2014 through 2016. Because we directly
considered differences in actual restatements across these groups of
issuers, these results should incorporate the effects of differences
across the groups in both reported and unreported material weaknesses
in ICFR. Our analysis demonstrated that issuers with revenues of less
than $100 million have, on average, restatement rates that are three to
nine percentage points lower than those for higher-revenue issuers of
the same filer status.\526\ This result is consistent with low-revenue
issuers being less likely to make restatements, even when they
experience high rates of ineffective ICFR, perhaps because they are
less susceptible to certain kinds of misstatements (such as those
related to revenue recognition).
---------------------------------------------------------------------------

    \526\ See Section III.C.4.b. of the Proposing Release, note 4
above. As discussed in the Proposing Release, note 4 above, while
observed restatements reflect misstatements that were detected and
may only be a subset of actual misstatements, we believe that the
lower restatement rates for low-revenue issuers are not driven by a
difference in the ability to detect misstatements among these
categories because we see this pattern for issuers with low rates of
ineffective ICFR as well as for other issuers. This result is also
consistent with the BIO Study, which finds that biotechnology EGCs
have a two to three percentage point lower restatement rate than
other non-accelerated or accelerated filers and attribute this to
their ``absence of product revenue.'' See BIO Study, note 69 above
(finding a 6.20 percent restatement rate for biotechnology EGCs
compared to rates of 7.98 percent and 9.25 percent for other non-
accelerated and accelerated filers respectively).

---------------------------------------------------------------------------

    A number of commenters maintained that the risks of financial
statement restatements or misstatements are greater for the issuers
that would not be subject to the ICFR auditor attestation requirement
under the proposed amendments than for other issuers.\527\ A few of
these commenters cited research that concludes that, since 2003, non-
accelerated U.S. filers accounted for 62 percent of the total U.S.
financial statement restatements.\528\ However, we note that this
research is not specific to low-revenue issuers, unlike our analysis.
As our analysis in the Proposing Release demonstrated, restatements are
less frequent for low-revenue issuers even among non-accelerated
filers. Further, the cited research does not adjust for the high
proportion of non-accelerated filers among all issuers.
---------------------------------------------------------------------------

    \527\ See, e.g., letters from Better Markets, CAQ, EY, Grant
Thornton, IMA, Prof. Barth et al., and RSM.
    \528\ See, e.g., letters from CAQ and CFA Inst.
---------------------------------------------------------------------------

    Other commenters noted that low-revenue issuers may be more
susceptible to misstatements in revenue recognition \529\ or in areas
other than revenue recognition,\530\ and that a higher risk of
misstatements may be driven by characteristics of these issuers other
than their low revenue, such as their lower resources or fewer
personnel,\531\ complex transactions or arrangements,\532\ or
activities that require significant accounting judgments.\533\ We note
that our analysis is intended to capture all of these risks of
restatements, by directly comparing rates of empirical restatements,
and that we still find that the lower revenue issuers, taken in
aggregate, are less likely to restate their financial statements than
other issuers of the same filer status. Thus, while certain subsets of
the affected issuers may be more prone to restatements than others
based on their specific characteristics, on average the affected
issuers as a group appear to have a lower overall risk of restatement
than higher-revenue issuers.
---------------------------------------------------------------------------

    \529\ See, e.g., letters from Better Markets and Prof. Barth et
al.
    \530\ See, e.g., letter from BDO.
    \531\ See, e.g., letters from CAQ, Crowe, EY, and Grant
Thornton.
    \532\ See, e.g., letter from BDO.
    \533\ See, e.g., letters from CFA Inst. and BDO.
---------------------------------------------------------------------------

    However, in response to the comments, we further examine the
argument that the affected issuers may be less susceptible to certain
kinds of misstatements, such as those related to revenue recognition,
by examining the types of restatements among low- and higher-revenue
accelerated filers other than EGCs in Table 11.\534\ We note that the
categorization of types and the names of these categories are based on
the categories and category titles provided in the Ives Group Audit
Analytics restatement database.
---------------------------------------------------------------------------

    \534\ These estimates are based on staff analysis of data from
Ives Group Audit Analytics. See note 298 above for details on the
identification of filer type. The sample includes 2,017 issuer-year
level observations that have low revenues and 3,862 issuer-year
observations that have higher revenues.

 Table 11--Percentage of All Accelerated Filers Other Than EGCS With Restatements of Different Types, by Revenue
                                Category, for Financial Statements From 2014-2018
----------------------------------------------------------------------------------------------------------------
                                                                           Accelerated filers (ex. EGCs)
                                                                 -----------------------------------------------
                        Restatement type                              Revenue         Revenue        Relative
                                                                      <$100M          >=$100M       percentage
----------------------------------------------------------------------------------------------------------------
Revenue recognition issues......................................             1.3             3.3              40
Cash flows statement (SFAS 95) classification errors............             1.0             1.7              60
Tax expense/benefit/deferral/other (FAS 109) issues.............             1.0             2.4              42
Inventory, vendor and/or cost of sales issues...................             0.8             1.8              45
Debt, quasi-debt, warrants & equity (BCF) security issues.......             0.7             0.6             115
Liabilities, payables, reserves and accrual estimate failures...             0.7             1.9              37
Accounts/loans receivable, investments & cash issues............             0.7             1.3              53
Expense (payroll, SGA, other) recording issues..................             0.6             1.5              43
Acquisitions, mergers, disposals, re-org acct issues............             0.5             0.9              55
Acquisitions, mergers, only (subcategory) acct issues...........             0.4             0.6              65
Deferred, stock-based and/or executive comp issues..............             0.4             0.5              85
EPS, ratio and classification of income statement issues........             0.3             0.6              53
Balance sheet classification of assets issues...................             0.3             0.4              77
Lease, SFAS 5, legal, contingency and commitment issues.........             0.3             0.6              53
Foreign, related party, affiliated, or subsidiary issues........             0.3             0.7              34
----------------------------------------------------------------------------------------------------------------

    Table 11 presents the percentage of low-revenue and higher-revenue
accelerated filers other than EGCs restating their financial statements
under a particular category of restatement for a given year from 2014
through 2018. The table presents the results for the 15 most common
restatement categories for low-revenue accelerated filers other than
EGCs. Restatements can fall into more than one category, so the total
of these percentages across all restatement categories would exceed the
average rate of restatements. We also report the relative percentage of
the restatement rate in a given category among the low-revenue issuers
relative to the higher-revenue issuers.
    Table 11 demonstrates that 1.3 percent of low-revenue accelerated
filers other than EGCs restated their financial statements for a given
year from 2014 to 2018 due to revenue recognition issuers, representing
about 40 percent of the rate of this type of restatement among higher-
revenue accelerated filers other than EGCs. Similarly, for the next
three most common categories of restatements for low-revenue
accelerated filers other than EGCs, the restatement rates of these
issuers represented 42- to 60 percent of the corresponding rates among
higher-revenue accelerated filers other than EGCs. Thus, this evidence
supports our belief that the affected issuers may be less susceptible
to certain kinds of misstatements, such as those related to revenue
recognition. However, consistent with commenters concerns about other
sources of misstatements, particularly with respect to complex
contracts and arrangements, we find that the rate of restatements in
some other categories is more similar across the two groups. For
example, the rate of restatements related to ``Debt, quasi-debt,
warrants & equity (BCF) security

issues'' and ``Deferred, stock-based and/or executive comp issues'' for
the low-revenue issuers represent 115 percent and 85 percent
respectively of the corresponding rates among the higher-revenue
issuers. However, the rate of restatements is greater for the low-
revenue issuers as compared to higher-revenue issuers only in the
``Debt, quasi-debt, warrants & equity (BCF) security issues'' category,
and only by a small margin: The restatement rates in this category are
within 0.1 percentage points of each other, such that they are not
statistically differentiable in our sample.\535\
---------------------------------------------------------------------------

    \535\ There is also a slightly higher rate of restatements
without a specified category among the low-revenue issuers, with 0.1
percent of their issuer-year level observations being associated
with ``Unspecified (amounts or accounts) restatement adjustments''
compared to 0.0 percent among the higher-revenue issuers.
---------------------------------------------------------------------------

    We therefore continue to believe that the evidence supports our
hypothesis that the affected issuers are less likely to make
restatements, perhaps because they are, on average, less susceptible to
certain kinds of misstatements (such as those related to revenue
recognition), than other accelerated filers. While this finding may
mitigate the adverse effects on the reliability of financial statements
for the affected issuers that will newly be exempt from all ICFR
auditor attestation requirements, we nonetheless expect some such
effects. Based on the analysis in the Proposing Release, and with
consideration for the difference in size and maturity of the affected
issuers versus the comparison sample, we estimated that the rate of
restatements among the affected issuers may increase by two percentage
points.\536\ Given their lower current rates of restatement, even after
such an increase the affected issuers may, on average, restate their
financial statements at a rate that is lower than that of issuers that
will remain accelerated filers, and that does not exceed that of non-
accelerated filers and EGCs with comparable revenues.
---------------------------------------------------------------------------

    \536\ See Section III.C.4.b. of the Proposing Release, note 4
above.
---------------------------------------------------------------------------

    Several commenters indicated that we should have given
consideration to the magnitude of restatements.\537\ In response to
these comments, we have undertaken two types of analysis. First, we
consider the potential effects on restatements that are deemed by
issuers to be material. To do this, we begin by repeating our analysis
for all types of restatements from the Proposing Release for the subset
of Item 4.02 restatements, which, as discussed above, are the
restatements that issuers deem to be material and report in Form 8-K
Item 4.02 disclosures, in Table 12.\538\
---------------------------------------------------------------------------

    \537\ See, e.g., letters from Better Markets, CFA Inst., and
Prof. Barth et al.
    \538\ The estimates in this table are based on staff analysis of
Ives Group Audit Analytics data. Percentages are computed out of all
issuers of a given filer type and revenue category with revenue data
and a SOX Section 404(a) management report available in the Ives
Group Audit Analytics database. The accelerated and non-accelerated
categories exclude EGCs. See note 298 above for details on the
identification of filer type.

    Table 12--Percentage of Issuers Issuing Item 4.02 Restatements by Year of Restated Financials, by Revenue
                                                    Category
----------------------------------------------------------------------------------------------------------------
                                                                                Non-
                          Restated year                             Accelerated     accelerated         EGC
                                                                    (ex. EGCs)      (ex. EGCs)
----------------------------------------------------------------------------------------------------------------
Revenue <$100M:
    2014........................................................             2.4             3.9             5.8
    2015........................................................             3.5             3.1             4.2
    2016........................................................             3.3             2.6             3.4
        Average/year............................................             3.0             3.2             4.5
Revenue >=$100M:
    2014........................................................             4.1             4.7             2.7
    2015........................................................             3.7             4.3             8.7
    2016........................................................             2.4             2.3             2.6
        Average/year............................................             3.4             3.8             4.7
                                                                 -----------------------------------------------
            Difference in average/year..........................            -0.4            -0.6            -0.2
----------------------------------------------------------------------------------------------------------------

    Table 12 demonstrates that, among low-revenue issuers, the
accelerated filers other than EGCs have a 0.2 percentage point
(relative to non-accelerated filers other than EGCs) or 1.5 percentage
point (relative to EGCs) lower rate of Item 4.02 restatements than the
issuers in the comparison populations, which are not subject to the
ICFR auditor attestation requirement. Following our analysis in the
Proposing Release, given the difference in size and maturity of the
affected issuers versus the comparison samples, we look to the lower
end of this range and, with rounding, estimate that the rate of Item
4.02 restatements among the affected issuers may increase by 0.5
percentage points. Given how low the rates of Item 4.02 restatements
are, the sample sizes in Table 12 are not sufficient to reliably
differentiate between these rates. We are nevertheless comfortable with
this estimate because it is consistent with the estimate that would be
obtained by applying the average rate of Item 4.02 restatements out of
all restatements, per Table 9 above,\539\ to our estimate of the effect
on total restatements.
---------------------------------------------------------------------------

    \539\ The ratio of Item 4.02 restatements to all restatements in
Table 7 ranges from 15 percent for large accelerated filers other
than EGCs (1.6 percent divided by 10.6 percent) up to 35 percent for
non-accelerated filers other than EGCs (2.9 percent divided by 8.5
percent). Applying these rates to our estimated 2 percentage point
effect on total restatements would result in an estimate of a 0.3 to
0.7 percentage point effect on Item 4.02 restatements.
---------------------------------------------------------------------------

    This estimate of the effects on restatements that issuers deem to
be material may help to provide some perspective on the magnitude of
the anticipated effect. We provide further analysis of these magnitudes
by exploring the market and financial statement impacts of the
estimated effect on restatements. Table 15 in Section IV.C.3.c below
provides related estimates per Item 4.02 restatement for low-revenue,
seasoned issuers. In particular, the average net income impact for Item
4.02 restatements is estimated to be -$1.9 million per year of restated
financials for the 80 percent of cases where there is a net income
impact, which is -$1.9 million times 80 percent or -$1.5 million on
average across all cases. The average stock market impact is estimated
to be -$1.4

million divided by 1.4 years or -$1 million per year of restated
financials. We multiply these estimates by our estimate that an
additional 0.5 percentage points of the affected issuers may have an
Item 4.02 restatement of their financial statements for a given year to
obtain estimates of -$7,500 in net income impact or -$5,000 in stock
market impact per year per affected issuer that will newly be exempt
from all ICFR auditor attestation requirements.
    One commenter provided alternative estimates of the magnitude of
the effect on restatements, estimating that the affected issuers
restated a total of $295 million in net income over the five years from
2014 through 2018 and that the 2018 restatements reduced market
capitalizations by $294 million in aggregate.\540\ We do not rely on
these estimates for two primary reasons. First, these estimates reflect
restatements that have occurred while these issuers are subject to the
ICFR auditor attestation requirement.\541\ They do not provide us with
information about the magnitude of new restatements that would be
experienced if this requirement were to be removed. The use of this
estimate would reflect an assumption that restatements would increase
by 100 percent upon removal of the ICFR auditor attestation
requirement, and we do not believe that there is evidence to support
such an assumption. If anything, these estimates demonstrate the
limitations of the ICFR auditor attestation requirement, in that
significant restatements still occur despite the requirement, rather
than informing us of the risks of removing the requirement.
---------------------------------------------------------------------------

    \540\ See letter from Prof. Barth et al. See also letter from
Better Markets, citing these estimates.
    \541\ Similarly, one commenter cites charges of misconduct at a
low-revenue issuer and argues that ``a well-designed ICFR audit
might have uncovered the control deficiencies, and related revenue
recognition violations, more quickly.'' See letter from CFA.
However, based on its EDGAR filings, the issuer was in fact subject
to the ICFR auditor attestation requirement in fiscal year 2014, the
beginning of the period of alleged misconduct (and may have been
subject to the requirement in the remainder of the period of alleged
misconduct as well, but did not file Form 10-K in the following
year), and the auditor's report in the associated Form 10-K attested
that the issuer's ICFR was effective.
---------------------------------------------------------------------------

    Secondly, these estimates reflect the years in which restatements
were announced rather than when the actual misstatement occurred.
Effective ICFR is intended to reduce the risk of material
misstatements, so we believe it is important to focus on when
misstatements occurred, not when earlier misstatements were detected
and announced, which could actually be a sign of a careful audit and
effective ICFR. Focusing on the year of the restatement announcement
rather than the year of the misstatement could capture firms that may
not have qualified as affected issuers during the time the
misstatements were made, but only dropped into the category of affected
issuers because of the reduction in public float or revenue that
resulted from the major restatement and related issues.\542\ In
contrast to the commenter's analysis, our analysis is designed to
measure the rate and magnitude of the incremental restatements that can
be attributed to misstatements in years in which the issuers would
qualify under the amendments to be exempt from the ICFR auditor
attestation requirement and that would not have occurred if the issuers
were subjected to this requirement.
---------------------------------------------------------------------------

    \542\ For example, a media report identified a particular issuer
included in one commenter's analysis of significant restatements
among issuers that were proposed to be exempted. See Dave Michaels,
SEC Plan Gives Audit Relief to Firms that Wiped Out over $290
Million, Wall St. J., July 26, 2019. See also letter from Prof.
Barth et al. (providing statistics but not identifying specific
issuers). Based on its EDGAR filings, the identified issuer had
revenues substantially in excess of $100 million, even after the
revisions described in the article, for fiscal years 2015 and 2016
(the periods with misstatements that were later restated). Further,
this issuer was subject to the ICFR auditor attestation requirement
as a large accelerated filer in 2015 and an accelerated filer in
2016. Therefore, we do not believe the amendments, if effective
during those fiscal years, would have exempted this issuer from the
ICFR auditor attestation requirement during the period in which the
misstatements were made.
---------------------------------------------------------------------------

iv. Effects on Fraudulent Financial Reporting
    Several commenters indicated that we should give additional
consideration to the potential impacts of the amendments on the risk of
fraud.\543\ Further, a number of commenters cautioned that the risks of
fraudulent financial reporting may be particularly high for low-revenue
issuers,\544\ perhaps because of their incentives to demonstrate strong
growth \545\ or because of their high implied price-to-revenue
multiples.\546\ As part of our consideration of these comments, we
conducted certain supplemental analysis regarding the risk of
fraudulent financial reporting. That analysis, discussed below,
provides additional context for considering the possible effects of the
amendments. We note that commenters did not provide their own analyses
or suggest specific methodologies for estimating any potential impact
of the amendments on the risk of fraud.
---------------------------------------------------------------------------

    \543\ See, e.g., letters from CFA Inst., CII, and Prof. Barth et
al.
    \544\ See, e.g., letter from CFA, CFA Inst., CII and Prof. Barth
et al.
    \545\ See, e.g., letter from CFA.
    \546\ See, e.g., letters from CII and Prof. Barth et al.
---------------------------------------------------------------------------

    We acknowledge that fraudulent misconduct does occur, including at
low-revenue issuers, and that the incentives to engage in such
misconduct could be heightened for certain low-revenue issuers,
depending on their specific situation. It is less clear what the
average risk of fraud is across low-revenue issuers in general, and how
this overall risk may be affected by the ICFR auditor attestation
requirement. Measuring these effects is challenging because the sample
sizes associated with typical measures of fraud are small, making
reliable statistical determinations difficult. Further, we do not have
an observable measure of all latent fraudulent conduct, but can only
examine fraud that has been detected and that led to some observable
action, which may not be a representative sample of all actual
fraudulent activity. However, we acknowledge that it is important to
carefully consider the potential impact of the amendments on the risk
of fraud. We therefore use the available evidence and data to analyze
this risk.
    We start by considering Accounting and Auditing Enforcement
Releases (``AAERs'') \547\ and cases of ``financial misconduct'' or
``financial reporting fraud'' based on subsets of these enforcement
actions, as discussed below. A commenter noted that the Proposing
Release did not consider the historical rate of fraud, the incidence of
AAERs, the incidence of Wells notices and of formal SEC
investigations.\548\ While ``fraud'' may be defined in different ways,
our analysis below considers the historical rate of fraud, based on
analysis of a subset of AAERs, and the incidence of AAERs. We believe
that these are more appropriate measures of potential fraud risk, as
they reflect incidents in which the Commission proceeded with charges.
In contrast, formal investigations and Wells notices do not always
uncover, and/or result in charges of, wrongdoing.\549\ The small sample
size of

AAERs limits our ability to apply the methodology we used to estimate
the potential impact on the prevalence of ineffective ICFR and the rate
of restatements \550\ to reliably estimate a potential effect on the
incidence of AAERs. Instead, we begin by examining the representation
of low-revenue as compared to higher-revenue issuers in the population
of issuers with AAERs or subsets of AAERs that include certain types of
charges, as compared to their representation in the broader population
of issuers, in order to investigate commenters concerns that the
affected issuers may face particularly high risks of fraudulent
financial reporting. We then separately apply results from existing
studies on fraudulent financial reporting to obtain an estimate of the
potential impact of the amendments on such misconduct.
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    \547\ AAERs refer to certain financial reporting related
enforcement actions concerning civil lawsuits brought by the
Commission in federal court and notices and orders concerning the
institution and/or settlement of administrative proceedings. Links
to these releases since 1999 are available at https://www.sec.gov/divisions/enforce/friactions.shtml.
    \548\ See letter from Prof. Barth et al.
    \549\ See David Solomon and Eugene Soltes, Is ``Not Guilty'' the
Same as ``Innocent''? Evidence from SEC Financial Fraud
Investigations, Working Paper (2019), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3402780 (finding that,
for financial fraud investigations by the Commission between 2002
and 2005, only 25 percent resulted in enforcement actions); and Jean
Eaglesham, SEC Drops 20% of Probes After ``Wells Notice,'' Wall St.
J., Oct. 9, 2013 (reporting that, for the two-year period that ended
in September 2012, 20 percent of the Wells notices issued were
associated with investigations that were later closed without taking
action being taken against the indicated parties). See also Terrence
Blackburne, John Kepler, Phillip Quinn and Daniel Taylor,
Undisclosed SEC Investigations, Working Paper (2019), available at
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3507083 (finding
that, for Commission investigations that were closed between 2000
and 2017, only 44 percent were eventually publicly disclosed, though
the study does not identify the subset of these cases involving
charges or any action being taken).
    \550\ See Tables 13 and 14 of the Proposing Release, note 4
above, and the accompanying text.
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    Because the overall sample size of AAERs is limited, we use the
full sample of years for which data is available, such that the alleged
misconduct we analyze ranges from fiscal year 1971 to 2016 (based on
AAERs issued from 1982 through 2018). We focus on issuers that are not
within five years of their IPO (``seasoned issuers'') to better
represent the affected issuers. Revenues are measured as of the date of
the first misstated financial statements associated with an AAER,
rather than at the date of the enforcement action, which is generally
many years after this date.\551\
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    \551\ The estimates in Table 13 are based on staff analysis of
the U.S.C. Marshall AAER Database, which contains information on
AAERs issued between May 1982 and December 2018, supplemented with
information from AAERs (for a smaller sample, as discussed below)
and data from Compustat. Multiple AAERs associated with the same
financial statement years are treated as a single case. Consecutive
years of financial statements associated with AAERs are also treated
as a single case.

   Table 13--Representation of Low-Revenue and Higher-Revenue Seasoned
          Issuers in the Population and Among Those With AAERs
------------------------------------------------------------------------
                                            Among issuers not within  5
                                                  years of IPO *
                                         -------------------------------
                                           Percent with    Percent with
                                              revenue         revenue
                                              <$100M          >=$100M
------------------------------------------------------------------------
Total issuer-year level observations                  50              50
 with revenue data **...................
Issuers with AAERs:
    With alleged ``financial                          42              58
     misstatements'' ***................
    and with ``financial misconduct''                 24              76
     charges ****.......................
    and with ``financial reporting                    30              70
     fraud'' charges *****..............
------------------------------------------------------------------------
* The years after an issuer's IPO are computed as of the first date of
  the financial statements associated with the AAERs.
** This row includes data for fiscal years from 1971 through 2016 to
  reflect the full horizon of years of alleged misconduct identified in
  the U.S.C. Marshall AAER Database. As noted below, data on ``financial
  misconduct'' charges and ``financial reporting fraud'' charges was
  only collected for AAERs issued from 2002 through 2018. While these
  charges represent alleged misconduct dating back to as early as 1985,
  they are more likely to reflect relatively more recent years than
  those reflected in the full sample of AAERs. We therefore note, for
  the purpose of consideration of the last two rows of Table 13, that
  the percentage of low-revenue issuers among the total issuer-year
  observations of seasoned issuers with revenue data is reduced somewhat
  in the more recent part of this sample, to about 47 percent when
  considering data from fiscal years 1985 through 2016 or about 42
  percent when considering data from fiscal years 2000 through 2016.
*** This row represents AAERs that the U.S.C. Marshall AAER Database
  indicates as being associated with alleged financial misstatements.
**** This row represents AAERs among those included in the previous row
  that also include charges under Section 13(b)(2)(A) (requiring issuers
  to make and keep books, records, and accounts, which, in reasonable
  detail, accurately and fairly reflect the transactions and
  dispositions of the assets of the issuer), Section 13(b)(2)(B)
  (requiring an issuer to devise and maintain a system of internal
  accounting controls sufficient to provide certain reasonable
  assurances), or Section 13(b)(5) (requiring that no person shall
  knowingly circumvent or knowingly fail to implement a system of
  internal accounting controls or knowingly falsify any book, record, or
  account) of the Securities Exchange Act, or Rules 13b2-1 (requiring
  that no person directly or indirectly, falsify or cause to be
  falsified, any book, record or account) or 13b2-2 (requiring certain
  representations and conduct by directors and officers in connection
  with the preparation of required reports and documents) under the
  Securities Exchange Act. We only supplemented the U.S.C. Marshall AAER
  Database with information about these specific charges where
  applicable for AAERs issued from 2002 through 2018 (which include
  alleged misconduct associated with financial statements from fiscal
  year 1985 through 2016), so the set of AAERs considered in the
  computations in this row reflect a substantially smaller population of
  AAERs than those included in the second row of this table, which
  includes earlier AAERs (issued beginning in 1982). Our estimates do
  not significantly change if we remove charges associated only with
  third parties rather than the issuer in question and/or its staff from
  the sample before running the analysis.
***** This row represents AAERs among those included in the previous row
  that also include charges under the anti-fraud statutes in Section
  17(a)(1) of the Securities Act or Section 10(b) of the Securities
  Exchange Act. See also note **** above regarding limitations on the
  population of AAERs for which we supplemented the U.S.C. Marshall AAER
  Database with information on these charges. Our estimates do not
  significantly change if we remove charges associated only with third
  parties rather than the issuer in question and/or its staff from the
  sample before running the analysis.

    In Table 13, we consider all AAERs with alleged financial
misstatements (row 2), as well as two subsets of these AAERs that we
identify for those issued in, roughly, the past two decades.\552\ The
first subset (row 3) represents those that we can identify as including
charges under Section 13(b)(2)(A), Section 13(b)(2)(B), or Section
13(b)(5) of the Securities Exchange Act, or Rules 13b2-1 or 13b2-2
under the Securities Exchange Act. These cases have been identified by
researchers as representing ``financial misconduct.'' \553\ The second

subset (row 4) is the subset of the ``financial misconduct'' cases that
we can identify as also including charges under Section 17(a)(1) of the
Securities Act or Section 10(b) of the Securities Exchange Act, which
is one common way of identifying cases of ``financial reporting
fraud.'' \554\ We note that others may define ``financial misconduct''
and ``financial reporting fraud'' differently.\555\
---------------------------------------------------------------------------

    \552\ The population of AAERs considered in these subsets is
limited to those issued from 2002 through 2018. See Table 13 above.
    \553\ See Jonathan Karpoff, Allison Koester, D. Scott Lee, and
Gerald Martin, Proxies and Databases in Financial Misconduct
Research, 92(6) Acct. Rev. 129 (2017) (``Karpoff et al. 2017
Study''). This study also raised concerns about omissions in the
U.S.C. Marshall AAER Database, which they refer to as the CFRM
database, but they noted that they understood that this issue was
being addressed and that users of the newer iterations of this
dataset, after the date of the study, should face lower or zero
rates of effective omissions.
    \554\ See, e.g., Karpoff et al. 2017 Study, note 553 above, and
COSO 2010 Fraud Study, note 505 above.
    \555\ See, e.g., Karpoff et al. 2017 Study, note 553 above,
(describing certain other measures researchers have used and their
limitations), note 553 above.
---------------------------------------------------------------------------

    Per the second through fourth rows of Table 13, the representation
of low-revenue seasoned issuers among all seasoned issuers with any of
these types of AAERs ranges from 24 to 42 percent. For comparison, we
also derive the representation of low-revenue seasoned issuers among
all seasoned issuers in the population. Per the first row of Table 13,
across all of the years of our sample, and specifically among the
seasoned issuers, 50 percent of the issuer-year observations are
associated with low revenues.\556\ Thus, we do not find evidence based
on the available data that low-revenue issuers are more highly
represented in the set of seasoned issuers associated with ``financial
misconduct'' or ``financial reporting fraud'' than they are in the
overall population of seasoned issuers.
---------------------------------------------------------------------------

    \556\ While the latter two rows of Table 13, regarding
``financial misconduct'' and ``financial reporting fraud,'' are
based on relatively more recent data (AAERs issued from 2002 through
2018, reflecting alleged misconduct from 1985 to 2016), we note that
considering the prevalence of low-revenue issuers in relatively more
recent years does not change our conclusions. For example, the
percentage of low-revenue issuers among the total issuer-year
observations of seasoned issuers with revenue data is about 47
percent when considering data from 1985 through 2016 (reaching a
minimum of 38 percent in 2016), which still exceeds the 25 to 30
percent of the seasoned issuers associated with ``financial
misconduct'' or ``financial reporting fraud'' that have low
revenues.
---------------------------------------------------------------------------

    A caveat to this finding is that it only reflects cases of
discovered and charged alleged misconduct, and may not be
representative of all cases of actual misconduct.\557\ Also, this
analysis is limited to the population of AAERs. There may be additional
cases of alleged misconduct with respect to financial reporting that
are charged but not associated with AAERs, and low-revenue issuers
could be more highly represented among these cases.\558\ Further, even
if the affected issuers may not be more likely to engage in fraudulent
financial reporting than other seasoned issuers on average, certain of
these affected issuers may have heightened incentives to engage in such
activities, as noted by the commenters cited above.
---------------------------------------------------------------------------

    \557\ We note that the required data, such as data on revenues,
may be less likely to be available for low-revenue issuers to the
extent that, like other small issuers, they are less likely to be
covered by traditional databases. This could reduce our ability to
detect a higher representation of these issuers among those with
various types of AAERs. However, this should generally be accounted
for in our analysis because we draw comparisons only within the
population of issuers with available data, and the same limitation
applies to our ability to estimate the representation of such
issuers in the overall population as in the population with AAERs.
    \558\ For example, not all of the enforcement actions listed in
the category of ``Issuer Reporting/Auditing & Accounting'' in the
Annual Report of the Commission's Division of Enforcement are
associated with AAERs. See, e.g., 2019 Annual Report, Division of
Enforcement, available at https://www.sec.gov/enforcement-annual-report-2019.pdf.
---------------------------------------------------------------------------

    We next consider whether expanding the exemption from the ICFR
auditor attestation requirement for such issuers would affect their
likelihood of engaging in such activities. To address this question, we
rely on a study that associates material weaknesses in ICFR with an
increased rate of ``financial reporting fraud.'' \559\ In particular,
the study associates reporting ``entity-level'' material weaknesses in
ICFR,\560\ but not other types of material weaknesses, with a 1.22
percentage point increase in the rate of ``financial reporting fraud''
over the following three years, or 0.41 percentage points (1.22 divided
by three) per year.
---------------------------------------------------------------------------

    \559\ See Donelson et al. 2017 Study, note 470 above. This study
identifies ``financial reporting fraud'' as either (1) the sample of
``fraud'' cases in the ``financial misrepresentation dataset'' from
www.fesreg.com that underlies the Karpoff et al. 2017 Study, note
553 above, which, based on the latter study, represents the subset
of Commission or Department of Justice enforcement actions that
include charges under Sections 13(b)(2)(A), Section 13(b)(2)(B), or
Section 13(b)(5) of the Securities Exchange Act, or Rules 13b2-1 or
13b2-2 under the Securities Exchange Act, that also include charges
under the anti-fraud statutes in Section 17(a)(1) of the Securities
Act or Section 10(b) of the Securities Exchange Act; or (2) settled
securities class-action lawsuits that allege violations of GAAP.
    \560\ This study defines entity-level material weaknesses as
those that Ives Group Audit Analytics identifies as being in any of
the following categories: (1) Non-routine transaction control
issues; (2) journal entry control issues; (3) foreign, related-
party, affiliated, or subsidiary issues; (4) an ineffective,
nonexistent, or understaffed audit committee; (5) senior management
competency, tone, or reliability issues; (6) an insufficient or
nonexistent internal audit function; (7) ethical or compliance
issues with personnel; or (8) accounting personnel resources,
competency, or training issues. See Donelson et al. 2017 Study, note
470 above.
---------------------------------------------------------------------------

    Given that any impact of the ICFR auditor attestation requirement
on the risk of fraud is likely to result from the effect of this
requirement on the effectiveness of ICFR, we apply the results of this
study to our estimated effect on ICFR to quantify the potential
increase in this risk that could be associated with the amendments. Per
the results earlier in this section, we estimate that the amendments
may eventually result in an additional 15 percentage points of the
affected issuers maintaining ineffective ICFR. Examining the types of
material weaknesses experienced by low-revenue issuers of different
filer statuses, we find that up to 85 percent of their material
weaknesses would be classified as ``entity-level'' material weaknesses
as defined by the study we are relying on.\561\ Applying the above
annualized estimate of a 0.41 percentage point increase in the rate of
financial reporting fraud for issuers reporting ``entity-level''
material weaknesses to our estimate of a 12.75 percentage point (15
percentage points times 85 percent) increase in the prevalence of such
material weaknesses, we estimate that the amendments could eventually
lead to an additional 0.05 percentage points (0.41 percent times 12.75
percentage points) of the affected issuers being associated with
alleged ``financial reporting fraud'' with respect to their financial
statements for a given year.
---------------------------------------------------------------------------

    \561\ See note 560 above.
---------------------------------------------------------------------------

    To better understand the magnitude of this potential effect, we
rely on another study that estimates that issuers lose a total of 38
percent of their equity market value upon announcements of ``financial
misrepresentation,'' or, given that the alleged violation periods in
their sample span 27 months on average, 17 percent of equity market
capitalization for each affected year.\562\ The affected issuers that
will be newly exempt from all ICFR auditor attestation requirements
have an average equity market capitalization of about $205 million. We
therefore estimate that the magnitude of the potential increase in
fraud risk is 0.05 percentage points (our estimated annualized rate of
the increase in issuer-years associated with

``financial reporting fraud'') times 17 percent times $205 million, or
about $17,500 in market capitalization per year per affected issuer
that will be newly exempt from the ICFR auditor attestation
requirements. We view this estimate as conservative because the study
we rely on includes issuers that are younger and significantly smaller
than the affected issuers, and we believe that the percentage of market
capitalization loss is likely to be greater for such firms.
---------------------------------------------------------------------------

    \562\ See Jonathan Karpoff, D. Scott Lee, and Gerald Martin, The
Cost to Firms of Cooking the Books, 48(3) J. of Fin. and
Quantitative Analysis 581 (2008) (``Karpoff et al. 2008 Study'').
The study defines ``financial misrepresentation'' consistently with
the ``financial misrepresentation dataset'' from www.fesreg.com
which, based on the Karpoff et al. 2017 Study, note 553 above,
represents the subset of Commission or Department of Justice
enforcement actions that include charges under Sections 13(b)(2)(A),
Section 13(b)(2)(B), or Section 13(b)(5) of the Securities Exchange
Act, or Rules 13b2-1 or 13b2-2 under the Securities Exchange Act.
While the ``financial misrepresentation'' sample does not also
require charges under the anti-fraud statutes, the Karpoff et al.
2008 Study indicates that over three-fourths of this sample was
associated with fraud charges.
---------------------------------------------------------------------------

    Overall, this analysis does not cause us to change our primary
conclusions regarding the potential effects of the amendments.
v. Timing of the Effects
    We anticipate that the potential adverse effects of the amendments
will develop gradually and are likely to be relatively limited in the
short term. We discuss the reasons that we expect a gradual evolution
in the remainder of this section. Nevertheless, we recognize that a
delay in realizing some of the associated costs from the amendments
would not necessarily mitigate their ultimate effects. The preceding
discussion is based on the comparison of steady-state differences
across issuers in different categories, and represents an analysis of
the eventual effects of the amendments. Because the amendments will
allow some current accelerated filers to transition to non-accelerated
filer status, some issuers that have already been subject to an audit
of ICFR for one or more years may no longer be required to obtain an
ICFR auditor attestation. While other issuers will enter into the
affected issuers category without having previously obtained an ICFR
auditor attestation, and such issuers are likely to represent a larger