The SEC Wimps Out

In what some business leaders called a victory for small public companies, the SEC proposed delaying when these companies must prove they have adequate safeguards in place to catch accounting mistakes and financial fraud.

The move was cheered by critics of requirements related to so-called internal controls. These safeguards are supposed to have been in place at public companies since the 1970s. Companies of all sizes, but particularly smaller firms, have complained about the costs of verifying the soundness of their internal controls, citing the need to add staff, purchase software and make other investments.

Governance advocates promptly slammed the delay, saying it could let problems fester at companies whose systems aren't up to snuff. Some close followers of the internal-controls debate offered a more nuanced view, saying that the later start date could give the SEC political breathing room yet still preserve investor protections.

If the SEC completely ignored complaints from small companies, "there was a nontrivial risk that Congress might" take action to water down or eliminate the internal-controls requirements for smaller companies, said Joseph Carcello, director of research for the corporate-governance center at the University of Tennessee. The SEC's proposed delay is "a way of letting some pressure out of the system with the expectation that these companies will eventually comply with the rules," he added.

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