A bill to reform certain provisions of section 404 of the Sarbanes-Oxley Act of 2002, to make compliance with that section more efficient, with the goal of maintaining United States capital market global competitiveness.

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Competitive and Open Markets That 
Protect and Enhance the Treatment of Entrepreneurs Act of 2007'' or the 
``Compete Act of 2007''.

SEC. 2. DEFINITIONS.

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

SEC. 3. INTERNAL CONTROL REPORTING AND EVALUATION.

    Section 404(b) of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 
7262(b)) is amended to read as follows:
    ``(b) Internal Control Reporting and Evaluation.--
            ``(1) Auditor attestation and report.--
                    ``(A) In general.--With respect to the internal 
                control assessment required by subsection (a), each 
                registered public accounting firm that prepares or 
                issues the audit report for the issuer shall, at the 
                interval determined under paragraph (2), attest to, and 
                report on, the assessment made by the management of the 
                issuer.
                    ``(B) Content.--The attestation and report on the 
                management assessment required by this paragraph--
                            ``(i) shall focus on the process and system 
                        management used--
                                    ``(I) to identify and manage risks;
                                    ``(II) to identify and implement 
                                key controls; and
                                    ``(III) to come to a conclusion on 
                                the effectiveness of the internal 
                                controls over financial reporting; and
                            ``(ii) shall not include a separate opinion 
                        on the outcome of the assessment, including any 
                        pass or fail opinion by the auditor on the 
                        effectiveness of the internal controls of 
                        management over financial reporting.
            ``(2) Intervals for attestation and report.--The 
        regulations of the Commission under this section--
                    ``(A) shall require that the attestation and report 
                required by paragraph (1) be performed during an 
                initial reporting period, and then at 3-year intervals; 
                and
                    ``(B) may require a shorter interval in the event 
                of a major shift in the structure or performance of the 
                issuer, such as a merger, a significant financial 
                restatement, evidence of fraud, or other such events, 
                as determined by the Commission
            ``(3) Standards for attestation and report.--
                    ``(A) Risk-based evaluation.--
                            ``(i) In general.--An attestation made 
                        under this subsection shall be made in 
                        accordance with standards for attestation 
                        engagements issued or adopted by the Board.
                            ``(ii) Requirements.--The standards issued 
                        or adopted by the Board for purposes of this 
                        subsection shall require that the audit of the 
                        management assessment of the internal controls 
                        of the issuer shall--
                                    ``(I) be designed, on the basis of 
                                the probability of risk and magnitude 
                                of potential harm, to focus on those 
                                controls that are critical to the 
                                accuracy of the financial statements of 
                                the issuer;
                                    ``(II) be consistent with the 
                                materiality standards prescribed by the 
                                Commission under paragraph (4); and
                                    ``(III) require that the 
                                determination by the auditor of the 
                                controls that create the greatest risk 
                                to the company shall be made in 
                                consultation with management of the 
                                issuer, and shall identify those 
                                greatest risks in consideration of the 
                                characteristics of the industry within 
                                which the issuer operates.
                    ``(B) Reliance on the work of others.--The 
                standards issued or adopted by the Board for purposes 
                of this subsection shall eliminate duplication of 
                audits and examinations--
                            ``(i) by allowing registered public 
                        accounting firms performing attestations and 
                        reports under this subsection to rely on 
                        examinations and inspections conducted by 
                        Federal and State regulatory agencies--
                                    ``(I) to the extent that such 
                                examinations and inspections focus on 
                                the risk-based internal controls of the 
                                issuer; and
                                    ``(II) to the extent practicable, 
                                without affecting the timely completion 
                                of the examinations and inspections;
                            ``(ii) where the issuer has engaged a 
                        third-party accountant to test and provide its 
                        management assessment of the internal control 
                        systems, by permitting--
                                    ``(I) the third-party accountant to 
                                work with registered public accounting 
                                firms performing attestations and 
                                reports under this subsection on 
                                determining the controls to be tested 
                                and the scope of the work;
                                    ``(II) the registered public 
                                accounting firms performing 
                                attestations and reports under this 
                                subsection to rely heavily on the work 
                                of the third-party accountant during 
                                the attestation engagement to avoid 
                                repetitive testing; and
                                    ``(III) management of the issuer to 
                                communicate openly with the registered 
                                public accounting firms performing 
                                attestations and reports under this 
                                subsection on all aspects of its 
                                internal controls.
                    ``(C) Definition.--For purposes of subparagraph 
                (B)(ii), the term `third-party accountant' means a 
                registered public accounting firm other than the 
                registered public accounting firm that is engaged to 
                perform the attestation and report under this 
                subsection.
            ``(4) Materiality standard.--The Commission shall develop a 
        standard of materiality for the conduct of the assessment and 
        report on an internal control under this subsection that shall 
        be based on the relationship of the internal control to the 
        reasonably possible effects on the financial statements of the 
        issuer, and its significance to the overall financial status of 
        the issuer.''.

SEC. 4. SMALLER PUBLIC COMPANY OPTION REGARDING INTERNAL CONTROL 
              PROVISION.

    Section 404 of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7262) is 
amended by adding at the end the following:
    ``(c) Smaller Public Company Option.--
            ``(1) Voluntary compliance.--A smaller issuer shall not be 
        subject to the requirements of subsection (a), unless the 
        smaller issuer voluntarily elects to comply with such 
        requirements, in accordance with regulations prescribed by the 
        Commission. Any smaller issuer that does not elect to comply 
        with subsection (a) shall state such election, together with 
        the reasons therefor, in its annual report to the Commission 
        under section 13(a) or 15(d) of the Securities Exchange Act of 
        1934 (15 U.S.C. 78m or 78o(d)).
            ``(2) Definition.--
                    ``(A) In general.--For purposes of this subsection, 
                and subject to subparagraph (B), the term `smaller 
                issuer' means an issuer for which an annual report is 
                required by section 13(a) or 15(d) of the Securities 
                Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)), that--
                            ``(i) has a total market capitalization at 
                        the beginning of the relevant reporting period 
                        of less than $700,000,000;
                            ``(ii) has total product and services 
                        revenue for that reporting period of less than 
                        $125,000,000; or
                            ``(iii) has, at the beginning of the 
                        relevant reporting period, fewer than 1500 
                        record beneficial holders.
                    ``(B) Annual adjustments.--The amounts referred to 
                in clauses (i) and (ii) of subparagraph (A) shall be 
                adjusted annually to account for changes in the 
                Consumer Price Index for all urban consumers, United 
                States city average, as published by the Bureau of 
                Labor Statistics.''.

SEC. 5. COMPETITION FOR AUDITING SERVICES.

    (a) Study Required.--The Commission and the Board shall jointly 
conduct a study examining the lack of, and impediments to, robust 
competition for the performance of audits for issuers.
    (b) Subjects of Study.--The study required by this section shall 
examine--
            (1) the causes for, and the measures that may be taken to 
        alleviate, the concentration of audit performance in only 4 
        large public accounting firms capable of servicing the larger 
        issuers; and
            (2) the extent to which the Commission and the Board may, 
        under existing law, take reasonable steps--
                    (A) to increase the number of qualified accounting 
                firms; and
                    (B) to eliminate de minimis conflict of interest 
                provisions.
    (c) Report.--
            (1) In general.--Not later than 6 months after the date of 
        enactment of this Act, the Commission and the Board shall 
        submit a joint report on the study required by this section to 
        the Committee on Banking, Housing, and Urban Affairs of the 
        Senate and the Committee on Financial Services of the House of 
        Representatives.
            (2) Requirements.--The report required by this subsection 
        shall--
                    (A) contain the results of the examination of each 
                of the subjects identified in subsection (b);
                    (B) make recommendations to the accounting industry 
                of measures that may be undertaken under existing 
                provisions of law, regulations, and standards to 
                alleviate the concentration described in subsection 
                (b)(1);
                    (C) identify the measures that the Commission and 
                the Board should be authorized to undertake to 
                alleviate such concentration; and
                    (D) make any recommendations to Congress for 
                changes in the laws administered by the Commission and 
                the Board that the Commission or the Board consider 
                appropriate and necessary on the basis of the study.

SEC. 6. PRINCIPLES-BASED GUIDANCE STUDY.

    (a) Study Required.--The Commission and the Board shall jointly 
conduct a study comparing and contrasting the principles-based Turnbull 
Guidance under the securities laws of Great Britain to the 
implementation of section 404 of the Sarbanes-Oxley Act of 2002.
    (b) Report.--
            (1) In general.--Not later than 1 year after the date of 
        enactment of this Act, the Commission and the Board shall 
        submit a joint report on the study required by this section to 
        the Committee on Banking, Housing, and Urban Affairs of the 
        Senate and the Committee on Financial Services of the House of 
        Representatives.
            (2) Requirements.--The report required by this subsection 
        shall--
                    (A) compare the relative accounting and other costs 
                of the principles-based Turnbull Guidance under the 
                securities laws of Great Britain and the implementation 
                of section 404 of the Sarbanes-Oxley Act of 2002, in 
                relation to the relative reduction in the level of risk 
                to investors and increase in the level of investor 
                confidence in the financial statements of issuers; and
                    (B) recommend to the Congress appropriate measures 
                to alleviate accounting and other costs in relation to 
                the reduction of such risk and the increase in such 
                confidence.

Summary: Competitive and Open Markets That Protect and Enhance the Treatment of Entrepreneurs Act of 2007, or the Compete Act of 2007 - Amends the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley) to revise requirements for the internal control assessment component of a securities issuer's annual report. Requires the attestation and report by a registered public accounting firm on an issuer's management assessment of its internal control structure and procedures to focus upon the process and system used by management to identify and manage risks, identify and implement key controls, and come to a conclusion on the effectiveness of the internal controls over financial reporting. Prohibits an auditor's attestation and report from including a separate (passfail) opinion on the effectiveness of such internal controls. Requires such attestation and report to be performed at three-year intervals. Prescribes standards for such attestations and reports, including a risk-based evaluation. Permits attestations and reports to rely on examinations and inspections by federal and state regulatory agencies. Instructs the Securities and Exchange Commission (SEC) to develop a standard of materiality for such assessments and reports based upon the relationship of the internal control to the reasonably possible effects on the financial statements of the issuer, and its significance to the overall financial status of the issuer. Exempts a smaller public company from the requirements for management assessment of internal controls, unless it voluntarily elects to comply with them. Directs the SEC and the Public Company Accounting Oversight Board to jointly conduct studies: (1) examining the lack of, and impediments to, robust competition for the performance of audits for issuers. And (2) comparing and contrasting the principles-based Turnbull Guidance under the British securities laws to the implementation of section 404 of Sarbanes-Oxley .