All's Fair, and 404:SEC Seeks Comment on Issues For Fair Value Roundtable;Adopts Final Rule Delaying Sarbox 404b for Small Cos

On Friday afternoon (June 20), the SEC announced that it adopted a final rule delaying the Sarbanes-Oxley Section 404(b) requirement for small public companies (i.e., ‘non-accelerated filers,’ generally defined as those with less than $75 million market cap) to have an external auditor perform and report on an audit of internal control. This means small co’s, which just this year had to file their first management report on internal control under Sarbox Section 404(a), will have an additional year (i.e., effective fiscal years ending on or after Dec. 15, 2009) to comply with Sarbox Section 404(b). Without the delay announced June 20, small co’s would have become subject to 404b in fiscal years ending on or after 12/15/08.

Additionally, the SEC said it received approval from the U.S. Office of Management and Budget (OMB) on June 19 “to proceed with data collection for a study of the costs and benefits of Section 404 implementation.” The cost-benefit study reportedly ‘commenced’ on Feb. 1, according to an earlier press release, but one step along the way apparently involved obtaining OMB approval, which is now in place.

Besides “focusing” the study on “the consequences for smaller companies and the effects of the Section 404 auditor attestation requirements,” the SEC notes the study will also “help determine whether the new management guidance on evaluating the internal controls over financial reporting issued by the Commission in June 2007 and the Public Company Accounting Oversight Board's (PCAOB) Auditing Standard No. 5 approved by the Commission in July 2007 are having the intended effect of facilitating more cost-effective internal control evaluations and audits of smaller reporting companies.” Additionally,”The study includes gathering new data from a broad array of companies about the costs and benefits of compliance with the Section 404 requirements. The study also pays special attention to those smaller companies that are complying for the first time with the requirements that are currently in effect.”

Some will criticize the delay, noting 404 has been around for years now, and small co’s have had ample time to get on board. However, others – like NYSE Euronext CEO Duncan Niederauer – are calling for a ‘rationalization’ of Sarbox for small co’s, and the breather allowed by this delay will enable the SEC and others to take a look at some objective (and subjective) data about cost-benefit obtained through the SEC’s study.

In other Friday afternoon news emanating from 100 F Street … the SEC announced it invites comment on the following issues to be addressed at its July 9 roundtable on fair value measurement:

• the usefulness of fair value accounting to investors
  
• potential market behavior effects from fair value accounting
  
• practical experience and potential challenges in applying fair value accounting standards
  
• aspects of the current standards, if any, that can be improved
  
• experience with auditors providing assurance regarding fair value accounting
  

A final agenda and list of participants and moderators for the roundtable will be announced at a later date.

We’ve covered fair value accounting issues extensively in this blog over the past year, particularly as relate to subprime securitizations and the credit market crisis. Links to some of our past coverage can be found in the FASB and IASB sections of our June 19 blog post.

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