SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Compete Act of 2007''.

SEC. 2. INTERNAL CONTROL REPORTING AND EVALUATION.

    Subsection (b) of section 404 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.--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 issue. The attestation and report 
        on the management assessment shall focus on the process and 
        system management used 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. Such attestation and report shall not include a 
        separate opinion on the outcome of the assessment, that is, the 
        auditor shall not issue a separate (pass/fail) opinion on the 
        effectiveness of management's internal controls over financial 
        reporting. Any such attestation shall not be the subject of a 
        separate engagement.
            ``(2) Intervals for attestation and report.--The 
        Commission's regulations under this section shall require that 
        the attestation and report required by paragraph (1) be 
        performed during an initial reporting period, and then at 3-
        year intervals. Such regulations shall require a shorter 
        interval in the event of a major shift in the company's 
        structure or performance, 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.--An attestation made 
                under this subsection shall be made in accordance with 
                standards for attestation engagements issued or adopted 
                by the Board. Such standards shall require that the 
                audit of the management assessment of the internal 
                control of the issuer shall 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, 
                and be consistent with the materiality standards 
                prescribed by the Commission under paragraph (4). Such 
                standards shall require that the determination by the 
                auditor of the controls that create the greatest risk 
                to the company shall be done in consultation with 
                management of the issuer and shall identify those 
                greatest risks on bases 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 implementing the requirements of this subsection 
                shall eliminate duplication of audits and examinations 
                by--
                            ``(i) allowing registered public accounting 
                        firms performing attestations and reports under 
                        this subsection to rely on examinations and 
                        inspections conducted by the Federal and state 
                        regulatory agencies to the extent those 
                        examinations and inspections focus on the 
                        issuer's risk-based internal controls;
                            ``(ii) where the issuer has engaged a 
                        third-party accountant to test and provide 
                        management's assessment of the internal control 
                        systems, 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 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 whether the internal control has a material affect 
        on the company's financial statements and is significant to the 
        issuer's overall financial status.''.

SEC. 3. SMALLER PUBLIC COMPANY EXEMPTION FROM 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 new subsection:
    ``(c) Smaller Public Company Exemption.--
            ``(1) Voluntary compliance.--A smaller public company shall 
        not be subject to the requirements of this section with respect 
        to any annual report unless such company voluntarily elects to 
        comply with such requirements, in accordance with regulations 
        prescribed by the Commission. Any smaller company that does not 
        elect to comply with such requirements with respect to an 
        annual report shall, in accordance with such regulations, 
        disclose that noncompliance in such report.
            ``(2) Definition.--For purposes of paragraph (1), the term 
        `smaller public company' 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--
                    ``(A) has a total market capitalization at the 
                beginning of the relevant reporting period of less than 
                $700,000,000;
                    ``(B) has total product and services revenue for 
                that reporting period of less than $125,000,000; or
                    ``(C) has, at the beginning of the relevant 
                reporting period, fewer than 1500 record beneficial 
                holders.''.

SEC. 4. COMPETITION FOR AUDITING SERVICES.

    (a) Study Required.--The Commission and the Board shall 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 four 
        large public accounting firms capable of servicing the larger 
        issuers;
            (2) the extent to which the Commission and the Board may, 
        under existing statutes, take reasonable steps--
                    (A) to increase the number of qualified accounting 
                firms; and
                    (B) to eliminate de minimis conflict of interest 
                provisions; and
            (3) methods that may be undertaken for encouraging--
                    (A) the largest public accounting firms to partner 
                with smaller public accounting firms; and
                    (B) coalitions among smaller public accounting 
                firms to compete for business for larger more complex 
                issuers.
    (c) Report.--Within 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 Financial Services 
of the House of Representatives and the Committee on Banking, Housing, 
and Urban Affairs of the Senate. Such report shall--
            (1) contain the results of the examination of each of the 
        subjects identified in subsection (b);
            (2) make recommendations to the accounting industry of 
        measures that may be undertaken under existing statutes, 
        regulations, and standards to alleviate the concentration 
        described in subsection (b)(1);
            (3) identify the measures that the Commission and the Board 
        should undertake to alleviate such concentration; and
            (4) make any recommendations to the 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 examination.

SEC. 5. PRINCIPALS-BASED GUIDANCE STUDY.

    (a) Study Required.--The Commission and the Board shall 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.--Within one 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 Financial Services 
of the House of Representatives and the Committee on Banking, Housing, 
and Urban Affairs of the Senate. Such report shall--
            (1) compare--
                    (A) the relative accounting and other costs of--
                            (i) the principles-based Turnbull Guidance 
                        under the securities laws of Great Britain; and
                            (ii) the implementation of section 404 of 
                        the Sarbanes-Oxley Act of 2002; in relation to
                    (B) the relative--
                            (i) reduction in the level of risk to 
                        investors; and
                            (ii) increase in the level of investor 
                        confidence in the financial statements of 
                        issuers; and
            (2) 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.

SEC. 6. DEFINITIONS.

    For purposes of this Act, the terms ``audit'', ``Board'', 
``Commission'', ``issuer'', and ``public accounting firm'' have the 
meanings given such terms in section 2 of the Sarbanes-Oxley Act of 
2002 (15 U.S.C. 7201).
Output: Compete Act of 2007 - Amends the Sarbanes-Oxley Act of 2002 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 (pass/fail) 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 to develop a standard of materiality for such assessments and reports based upon whether the internal control has a material effect on the company's financial statements and is significant to the issuer's overall financial status.

Exempts a smaller public company from the requirements for management assessment of internal controls, unless it voluntarily elects to comply with them.