The preliminary recommendations to give companies a break from strict assessments of internal controls over financial reporting were approved on Wednesday almost unanimously. Only Kurt Schacht, the executive director of the CFA Centre for Financial Market Integrity, rejected the plan.

"It's easier to say we are better off over-auditing than under-auditing," said Janet Dolan, chief executive of Tennant Co. and head of a subcommittee that developed the proposal.

"However, over-auditing comes at a price, and when that occurs on a large scale across all of our capital markets, the cost to our economy is huge."

Companies have been complaining about the controversial internal-controls section of the 2002 law for years, with howls growing louder since large companies came under the requirement for the first time last year.

Under the measure, company executives are required to assess their internal controls over financial reporting and to hire outside auditors to assess those controls.

The SEC's advisory committee on smaller public companies voted to recommend rolling back that requirement entirely for companies with a market capitalization of $125 million or less, or about half of the companies in the market. In exchange, these companies would be subject to stricter corporate-governance requirements.

Larger companies - those with a market capitalization of between $125 million to about $750 million and prior-year revenue of no more than $250 million - would also be exempt from hiring an outside auditor to test internal controls under recommendations approved on Wednesday.

Management at larger companies would still have to submit an annual assessment of the quality of their internal controls.

The SEC's advisory committee on smaller public companies is scheduled to next meet on Jan. 23 and will issue its final, non-binding recommendations in the spring. The recommendations will be published for public comment before the SEC decides whether to adopt some or all of the recommendations.

Schacht suggested that exempting so many companies from a key part of the 2002 Sarbanes-Oxley law could invite a legal challenge.

In the event that the recommendations meet with resistance in the SEC, the panel also voted to recommend an alternative approach that would lessen regulations on 80 percent of public companies without completely relieving them of outside oversight of internal controls.

-- SIOBHAN HUGHES (Dow Jones Newswires)