II 

110TH CONGRESS 

1ST SESSION S. 869 

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. 

IN THE SENATE OF THE UNITED STATES 

MARCH 14, 2007 

Mr. DEMINT (for himself and Mr. MARTINEZ) introduced the following bill; 

which was read twice and referred to the Committee on Banking, Housing, and Urban Affairs 

A BILL 

To reform certain provisions of section 404 of the SarbanesOxley Act of 2002, to make compliance with that section 

more efficient, with the goal of maintaining United 

States capital market global competitiveness. 

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled, 

3 SECTION 1. SHORT TITLE. 

4 This Act may be cited as the ‘‘Competitive and Open 

5 Markets That Protect and Enhance the Treatment of En6 trepreneurs Act of 2007’’ or the ‘‘Compete Act of 2007’’. 


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1 SEC. 2. DEFINITIONS. 

2 For purposes of this Act, the terms ‘‘audit’’, 

3 ‘‘Board’’, ‘‘Commission’’, ‘‘issuer’’, and ‘‘public account4 ing firm’’ have the same meanings as in section 2 of the 

5 Sarbanes-Oxley Act of 2002 (15 U.S.C. 7201). 

6 SEC. 3. INTERNAL CONTROL REPORTING AND EVALUA7 TION. 

8 Section 404(b) of the Sarbanes-Oxley Act of 2002 

9 (15 U.S.C. 7262(b)) is amended to read as follows: 

10 ‘‘(b) INTERNAL CONTROL REPORTING AND EVALUA11 TION.— 

12 ‘‘(1) AUDITOR ATTESTATION AND REPORT.— 

13 ‘‘(A) IN GENERAL.—With respect to the 

14 internal control assessment required by sub15 section (a), each registered public accounting 

16 firm that prepares or issues the audit report for 

17 the issuer shall, at the interval determined 

18 under paragraph (2), attest to, and report on, 

19 the assessment made by the management of the 

20 issuer. 

21 ‘‘(B) CONTENT.—The attestation and re22 port on the management assessment required 

23 by this paragraph— 

24 ‘‘(i) shall focus on the process and 

25 system management used— 


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1 ‘‘(I) to identify and manage 

2 risks; 

3 ‘‘(II) to identify and implement 

4 key controls; and 

5 ‘‘(III) to come to a conclusion on 

6 the effectiveness of the internal con7 trols over financial reporting; and 

8 ‘‘(ii) shall not include a separate opin9 ion on the outcome of the assessment, in10 cluding any pass or fail opinion by the 

11 auditor on the effectiveness of the internal 

12 controls of management over financial re13 porting. 

14 ‘‘(2) INTERVALS FOR ATTESTATION AND RE15 PORT.—The regulations of the Commission under 

16 this section— 

17 ‘‘(A) shall require that the attestation and 

18 report required by paragraph (1) be performed 

19 during an initial reporting period, and then at 

20 3-year intervals; and 

21 ‘‘(B) may require a shorter interval in the 

22 event of a major shift in the structure or per23 formance of the issuer, such as a merger, a sig24 nificant financial restatement, evidence of 


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1 fraud, or other such events, as determined by 

2 the Commission 

3 ‘‘(3) STANDARDS FOR ATTESTATION AND RE4 PORT.— 

5 ‘‘(A) RISK-BASED EVALUATION.— 

6 ‘‘(i) IN GENERAL.—An attestation 

7 made under this subsection shall be made 

8 in accordance with standards for attesta9 tion engagements issued or adopted by the 

10 Board. 

11 ‘‘(ii) REQUIREMENTS.—The standards 

12 issued or adopted by the Board for pur13 poses of this subsection shall require that 

14 the audit of the management assessment of 

15 the internal controls of the issuer shall— 

16 ‘‘(I) be designed, on the basis of 

17 the probability of risk and magnitude 

18 of potential harm, to focus on those 

19 controls that are critical to the accu20 racy of the financial statements of the 

21 issuer; 

22 ‘‘(II) be consistent with the ma23 teriality standards prescribed by the 

24 Commission under paragraph (4); and 


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1 ‘‘(III) require that the deter2 mination by the auditor of the con3 trols that create the greatest risk to 

4 the company shall be made in con5 sultation with management of the 

6 issuer, and shall identify those great7 est risks in consideration of the char8 acteristics of the industry within 

9 which the issuer operates. 

10 ‘‘(B) RELIANCE ON THE WORK OF OTH11 ERS.—The standards issued or adopted by the 

12 Board for purposes of this subsection shall 

13 eliminate duplication of audits and examina14 tions— 

15 ‘‘(i) by allowing registered public ac16 counting firms performing attestations and 

17 reports under this subsection to rely on ex18 aminations and inspections conducted by 

19 Federal and State regulatory agencies— 

20 ‘‘(I) to the extent that such ex21 aminations and inspections focus on 

22 the risk-based internal controls of the 

23 issuer; and 

24 ‘‘(II) to the extent practicable, 

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1 tion of the examinations and inspec2 tions; 

3 ‘‘(ii) where the issuer has engaged a 

4 third-party accountant to test and provide 

5 its management assessment of the internal 

6 control systems, by permitting— 

7 ‘‘(I) the third-party accountant 

8 to work with registered public ac9 counting firms performing attesta10 tions and reports under this sub11 section on determining the controls to 

12 be tested and the scope of the work; 

13 ‘‘(II) the registered public ac14 counting firms performing attesta15 tions and reports under this sub16 section to rely heavily on the work of 

17 the third-party accountant during the 

18 attestation engagement to avoid repet19 itive testing; and 

20 ‘‘(III) management of the issuer 

21 to communicate openly with the reg22 istered public accounting firms per23 forming attestations and reports 

24 under this subsection on all aspects of 

25 its internal controls. 


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1 ‘‘(C) DEFINITION.—For purposes of sub2 paragraph (B)(ii), the term ‘third-party ac3 countant’ means a registered public accounting 

4 firm other than the registered public accounting 

5 firm that is engaged to perform the attestation 

6 and report under this subsection. 

7 ‘‘(4) MATERIALITY STANDARD.—The Commis8 sion shall develop a standard of materiality for the 

9 conduct of the assessment and report on an internal 

10 control under this subsection that shall be based on 

11 the relationship of the internal control to the reason12 ably possible effects on the financial statements of 

13 the issuer, and its significance to the overall finan14 cial status of the issuer.’’. 

15 SEC. 4. SMALLER PUBLIC COMPANY OPTION REGARDING 

16 INTERNAL CONTROL PROVISION. 

17 Section 404 of the Sarbanes-Oxley Act of 2002 (15 

18 U.S.C. 7262) is amended by adding at the end the fol19 lowing: 

20 ‘‘(c) SMALLER PUBLIC COMPANY OPTION.— 

21 ‘‘(1) VOLUNTARY COMPLIANCE.—A smaller 

22 issuer shall not be subject to the requirements of 

23 subsection (a), unless the smaller issuer voluntarily 

24 elects to comply with such requirements, in accord25 ance with regulations prescribed by the Commission. 


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1 Any smaller issuer that does not elect to comply 

2 with subsection (a) shall state such election, together 

3 with the reasons therefor, in its annual report to the 

4 Commission under section 13(a) or 15(d) of the Se5 curities Exchange Act of 1934 (15 U.S.C. 78m or 

6 78o(d)). 

7 ‘‘(2) DEFINITION.— 

8 ‘‘(A) IN GENERAL.—For purposes of this 

9 subsection, and subject to subparagraph (B), 

10 the term ‘smaller issuer’ means an issuer for 

11 which an annual report is required by section 

12 13(a) or 15(d) of the Securities Exchange Act 

13 of 1934 (15 U.S.C. 78m or 78o(d)), that— 

14 ‘‘(i) has a total market capitalization 

15 at the beginning of the relevant reporting 

16 period of less than $700,000,000; 

17 ‘‘(ii) has total product and services 

18 revenue for that reporting period of less 

19 than $125,000,000; or 

20 ‘‘(iii) has, at the beginning of the rel21 evant reporting period, fewer than 1500 

22 record beneficial holders. 

23 ‘‘(B) ANNUAL ADJUSTMENTS.—The 

24 amounts referred to in clauses (i) and (ii) of 

25 subparagraph (A) shall be adjusted annually to 


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1 account for changes in the Consumer Price 

2 Index for all urban consumers, United States 

3 city average, as published by the Bureau of 

4 Labor Statistics.’’. 

5 SEC. 5. COMPETITION FOR AUDITING SERVICES. 

6 (a) STUDY REQUIRED.—The Commission and the 

7 Board shall jointly conduct a study examining the lack of, 

8 and impediments to, robust competition for the perform9 ance of audits for issuers. 

10 (b) SUBJECTS OF STUDY.—The study required by 

11 this section shall examine— 

12 (1) the causes for, and the measures that may 

13 be taken to alleviate, the concentration of audit per14 formance in only 4 large public accounting firms ca15 pable of servicing the larger issuers; and 

16 (2) the extent to which the Commission and the 

17 Board may, under existing law, take reasonable 

18 steps— 

19 (A) to increase the number of qualified ac20 counting firms; and 

21 (B) to eliminate de minimis conflict of in22 terest provisions. 

23 (c) REPORT.— 

24 (1) IN GENERAL.—Not later than 6 months 

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1 sion and the Board shall submit a joint report on 

2 the study required by this section to the Committee 

3 on Banking, Housing, and Urban Affairs of the Sen4 ate and the Committee on Financial Services of the 

5 House of Representatives. 

6 (2) REQUIREMENTS.—The report required by 

7 this subsection shall— 

8 (A) contain the results of the examination 

9 of each of the subjects identified in subsection 

10 (b); 

11 (B) make recommendations to the account12 ing industry of measures that may be under13 taken under existing provisions of law, regula14 tions, and standards to alleviate the concentra15 tion described in subsection (b)(1); 

16 (C) identify the measures that the Com17 mission and the Board should be authorized to 

18 undertake to alleviate such concentration; and 

19 (D) make any recommendations to Con20 gress for changes in the laws administered by 

21 the Commission and the Board that the Com22 mission or the Board consider appropriate and 

23 necessary on the basis of the study. 


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1 SEC. 6. PRINCIPLES-BASED GUIDANCE STUDY. 

2 (a) STUDY REQUIRED.—The Commission and the 

3 Board shall jointly conduct a study comparing and con4 trasting the principles-based Turnbull Guidance under the 

5 securities laws of Great Britain to the implementation of 

6 section 404 of the Sarbanes-Oxley Act of 2002. 

7 (b) REPORT.— 

8 (1) IN GENERAL.—Not later than 1 year after 

9 the date of enactment of this Act, the Commission 

10 and the Board shall submit a joint report on the 

11 study required by this section to the Committee on 

12 Banking, Housing, and Urban Affairs of the Senate 

13 and the Committee on Financial Services of the 

14 House of Representatives. 

15 (2) REQUIREMENTS.—The report required by 

16 this subsection shall— 

17 (A) compare the relative accounting and 

18 other costs of the principles-based Turnbull 

19 Guidance under the securities laws of Great 

20 Britain and the implementation of section 404 

21 of the Sarbanes-Oxley Act of 2002, in relation 

22 to the relative reduction in the level of risk to 

23 investors and increase in the level of investor 

24 confidence in the financial statements of 

25 issuers; and 


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1 (B) recommend to the Congress appro2 priate measures to alleviate accounting and 

3 other costs in relation to the reduction of such 

4 risk and the increase in such confidence. 

Æ 


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