Scaling the Costs of 404 Testing to Fit the Needs of Small Public Companies

In July of 2002, the Sarbanes-Oxley Act was passed by Congress, including section 404 which requires the auditors to test and opine on the company's internal controls. Since that time there has been much debate about whether the intended benefits of increased investor confidence and financial statement transparency trump the unexpectedly high compliance costs, especially for public companies with market-caps less than $75 million. Before these companies begin complying in the upcoming year, interest groups are calling for the requirements to be 'scaled' to better fit the needs of these companies. While auditors already are expected to scale their audit approach to each individual client, more must be done to significantly decrease the costs in order to reverse the trend of small companies foregoing listing on U.S. capital markets. Increased guidance from the PCAOB, SEC, and other related parties could help the small-cap companies and their auditors be aware of best practices. Also, exempting industries that already follow similar guidelines or are significantly injured by the compliance requirements could help. Lastly, the controversial proposal of rotational audits could be put in place if the affected parties cooperate to remove the undue burden on these small-cap companies. Without some form of significant action, the investors could soon lose the ability to buy small-cap companies in U.S. markets.

CPA Shortage

This report is on current issue of the shortage of Certified Public Accountants. It discusses the reasons for the shortage, such as the newest 150-hour requirement, as well as the increased need for accountants after Sarbanes-Oxley. Also, It discusses what companies are doing to get more people into the accounting profession and keep the people they have. There is also a Case Study on what Deloitte & Touche is doing to help their firm. This paper develops ideas and possible solutions to help accounting firms deal with and change the current shortage situation they are in.

Redlining, the Community Reinvestment Act, and Private Mortgage Insurance

This paper examines whether neighborhood racial or income composition influences a lender's treatment of mortgage applications. Recent studies have found little evidence of differential treatment based on either the racial or income composition of the neighborhood, once the specification accounts for neighborhood risk factors. This paper suggests that lenders may favor applicants from CRA-protected neighborhoods if they obtain Private Mortgage Insurance (PMI) and that this behavior may mask lender redlining of low income and minority neighborhoods. For loan applicants who are not covered by PMI, this paper finds strong evidence that applications for units in low-income neighborhoods are less likely to be approved, and some evidence that applications for units in minority neighborhoods are less likey to be approved, regardless of the race of the applicant. This pattern is not visible in earlier studies because lenders appear to treat applications from these neighborhoods more favorably when the applicant obtains PMI.