On Monday, the House passed the Fostering Innovation Act of 2015, notwithstanding this letter to Paul Ryan and Nancy Pelosi from the SEC’s Investor Advocate urging a vote against it. The bill, which presumably now moves to the Senate for consideration, amends Section 404(b) of SOX (internal controls), “to provide a temporary exemption for low-revenue issuers from certain auditor attestation requirements.”

More specifically, the bill would temporarily exempt from the SOX auditor attestation requirement — that the issuer’s auditor attest to management’s assessment of the effectiveness of the issuer’s internal control over financial reporting — any issuer that ceased to be an emerging growth company after the fifth anniversary of its IPO, had average annual gross revenues of less than $50 million as of its most recently completed fiscal year, and is not a large accelerated filer.

The issuer would become ineligible for the exemption at the earliest of the last day of its fiscal year following the tenth anniversary of its IPO, the last day of its fiscal year when its average annual gross revenues exceed $50 million, or the date on which it becomes a large accelerated filer.

The term “average annual gross revenues” means the total gross revenues over the issuer’s most recently completed three fiscal years divided by three.

When the bill was introduced, BIO, the biotech trade association, applauded the bill’s authors, observing that the bill “would build on the success of the JOBS Act by acknowledging that many biotechs will remain pre-revenue even after the five-year EGC clock expires. By extending the JOBS Act’s SOX 404(b) exemption for an additional five years, the Fostering Innovation Act would ensure that small business innovators can remain laser-focused on the search for groundbreaking cures and treatments.”

The SEC’s Investor Advocate, however, viewed the bill as “ill-advised.” He contended that the auditor attestation requirement of SOX was one of the key reforms enacted following “on the heels of the Enron implosion and other accounting scandals that wreaked havoc on American investors…. This ‘second set of eyes’ helps to identify potential risks of material misstatements and is designed to prevent or detect fraud. Unfortunately, H.R. 4139 would chip away further at the requirement for a second set of eyes, even though auditor attestation enhances reliability of financial reporting for investors, which has been shown to reduce the cost of capital for businesses.”

The letter cited empirical research that established the benefits for both investors and companies of the auditor attestation, including a 2011 SEC study showing that “companies that do not have an auditor attestation tend to have significantly more material weaknesses in their internal controls and more financial restatements.” In addition, citing academic testimony before a Congressional subcommittee, he contended that “there is a positive correlation between a material weakness in internal control and the future revelation of fraud. Indeed, companies with more serious control problems tend to be smaller, less mature, growing, or rapidly changing.” He also observed that the bill introduces another category of issuers, further compounding the complexity of public company reporting.