The U.S. Chamber’s Center for Capital Market’s Competitiveness is conducting an on-line survey to compile data on the projected costs of Sarbanes-Oxley (SOX) Section 404(b) and its impact on smaller public companies, defined in SEC rules as “non-accelerated filers”.
Sarbanes-Oxley Section 404(b) requires the external auditor to report on the adequacy of the company’s internal control over financial reporting.
In 2007 the Chamber released a similar study, which showed that compliance with Section 404(b) would disproportionately burden small businesses. That study was part of a successful effort to delay compliance with 404(b) for a full year.
Please take a moment to complete the brief survey of eight questions that will inform Capitol Hill and The U.S. Securities and Exchange Commission (SEC) of the impacts that Section 404(b) will have on small business. We appreciate your time and effort in this regard. Here is the link to the U.S. Chamber's online survey on Sarbox 404(b) The survey will be available until next Friday, September 18
Please note FEI is not conducting the above-referenced survey, we are simply sharing the above information about the U.S. Chamber of Commerce survey. If you have any questions about the U.S. Chamber's survey, contact Jonathan L. Jachym, Legal and Regulatory Counsel, Center for Capital Markets Competitiveness, U.S. Chamber of Commerce email@example.com.
The most recent survey conducted by FEI relating to audit fees generally was published earlier this year; see FEI's June 3, 2009 press release; full survey results can be obtained from the Financial Executives Research Foundation (FERF) bookstore.
Small Co Implementation of 404(b) Required This Year; SEC Cost-Benefit Study Awaited
As we noted in this blog on Dec. 18, 2008, and Jan. 17, 2009, the SEC's Office of Economic Analysis launched a separate survey last year on the costs and benefits of implementation of the existing rules under Sarbanes-Oxley Section 404. According to SEC's Jan. 16, 2009 press release, the SEC received more than 2,000 responses to its survey.
When the SEC originally announced on June 20, 2008, that it would embark on a study of the costs and benefits of implementation of internal control reporting under the SEC and PCAOB rules issued under the Sarbanes-Oxley Act (specifically Section 404), the Commission concurrently extended the effective date for small public companies of the Sarbanes-Oxley Section 404(b) external audit requirement. Specifically, Section 404(b) requires external auditors to opine on a small companies' internal controls; the 404(b) requirement was extended to fiscal years ending on or after Dec. 15, 2009. (See SEC Final Rule, Internal Control Over Financial Reporting in Exchange Act Periodic Reports of Non-Accelerated Filers posted June 26, 2008 and related Technical Amendment.)
The objective of SEC's cost-benefit study was explained in SEC's June 20, 2008 press release as follows:
The SEC staff's cost-benefit study will 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. 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.
Significantly, the extension of the Section 404(b) requirement for small companies did not impact the deadline for the Section 404(a) requirement for management's report on internal control, which was delayed previously for small public companies, but became effective in 2007. (Large public companies have already been complying with both Section 404(a) and Section 404(b) since 2005.)
Additionally, the extension for small companies with respect to the Section 404(b) external auditor's report on internal control does not impact longstanding requirements for audited financial statements; 404(b) is scoped specifically to the audit of internal control (which will become integrated with the existing audit of the financial statements).
Results of the SEC's survey have not yet been released, and are expected to be included in a broader SEC study of the costs and benefits of Sarbanes-Oxley Section 404, as noted in the SEC press releases cited above.
Resources For Small Public Companies
Small public companies can find resources relating to Sarbanes-Oxley Section 404 on SEC's Spotlight on Internal Control Reporting Provisions, including SEC's 2007 publication: Sarbanes-Oxley Section 404: A Guide for Small Business.
See also PCAOB's webpage on Auditing Standard No. 5: An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements; the webpage includes a link to PCAOB Staff Views on [AS5]: Guidance for Smaller Public Companies.
The PCAOB also is continuing its series of Forums on Auditing in the Small Business Environment; with forums set to take place in Houston Sept. 23, Denver Nov. 3, and Orlando Dec. 1. Preregistration is required; further details on upcoming forums, and links to slides from past forums, are available here.
Additionally, see information published by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), including COSO's 2006 Guidance for Smaller Public Companies.
American Enterprise Inst. Holds Forum On Sarbanes-Oxley and the Financial Crisis
In related news, earlier this week, the American Enterprise Institute hosted a forum on: Sarbanes-Oxley and the Financial Crisis. The keynote presentation was given by former Speaker of the House of Representatives (and current AEI senior fellow) Newt Gingrich; additional commentary was provided by former SEC Chairman (and current CEO of Kalorama Partners LLC) Harvey L. Pitt, as well as Hans Bader of the Competitive Enterprise Institute, and AEI resident fellow Alex J. Pollock. Recordings of the program are posted on the American Enterprise Institute's website in video and audio format.
Gingrich emphasized six points in his remarks at the American Enterprise Institute program, according to FEI intern Maxwell Hyman who attended the program:
- Sarbanes-Oxley has a devastating effect entrepreneurship and venture capital. The costs of Sarbanes-Oxley compliance delay start up and innovation for small businesses, and cuts into the already low funding of venture capital.
- Congress estimated the costs of the bill to small businesses to be around $90,000 dollars, but they are actually upwards $900,000 dollars. Congress has a duty to repeal acts that are 100% over their estimated cost, but Sarbox is about 1000% of the original estimate.
- Our economy is beginning to become burdened by regulations like Sarbanes Oxley to a point where the country is at risk of losing its competitive edge against governments that do not have much regulation, such as China which takes a very pragmatic approach to the economy and job growth. Our unemployment rate could easily reach 20%. In these conditions, any measure that prevents startup is suicidal.
- Sarbox misdirects the management and the board of directors. Executives and management are focusing on PCAOB and Act compliance instead of creating new and innovative ways to compete in an international market. “The criminalization of Boards of directors is fundamentally irrational if you want economic growth.”
- Sarbanes-Oxley was created to punish the public sector for bad accounting practices, but ironically, companies are now moving into the private sector to avoid regulations.
- The Act also didn’t contribute any information during the start of the most recent financial meltdown. Many companies were associated with accounting and auditing fraud, but there weren’t any known successes of the PCAOB in finding any wrongdoing. Despite all the costs, there is no net gain from the bill.
ABA Asks Geithner, Bernanke to Raise Fair Value Accounting At G-20
WebCPA reported earlier today: Bankers Want G-20 To Rein In FASB, IASB. The article notes:
The American Bankers Association has written to Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke asking them to raise accounting issues at the upcoming G-20 meeting in Pittsburgh in order to curb efforts by standard-setters to expand mark-to-market accounting to loans and debt instruments. In the letter, ABA president and CEO Edward Yingling claimed that the mark-to-market accounting changes proposed by the Financial Accounting Standards Board and the International Accounting Standards Board are at odds with the changes recommended by the G-20 in a statement last week.
"Most experts, including banking leaders, believe that repairs are needed to the accounting model, particularly in the area of provisioning for loan losses,” wrote Yingling. However, he argued that the FASB and IASB proposals go too far and “would undermine the G-20’s efforts to strengthen the financial system.”
Read ABA's Sept. 9, 2009 Letter to Geithner, Bernanke. [NOTE: See our Aug. 13, 2009 post for further details on ABA's concerns with the FASB and IASB financial instruments projects, particularly as relate to fair value.] For related reading, see our Sept. 8 post about the G-20. [UPDATE: We have followed fair value accounting/mark-to-market issues frequently in this blog; for just a few examples, see our posts from Feb. 26, 2009, Feb. 24, 2009, April 20, 2009, April 3, 2009, Nov. 26, 2008, Nov. 23, 2008, and Oct. 13, 2008.]
For another point of view, see Floyd Norris' article in the New York Times, Accountants Misled Us Into The Crisis, and Jonathan Weil's commentary in Bloomberg, Five People Who Stayed Clean in Banking's Bilge.
I feel like no post today would be complete without saying something about 9/11. (These are my views only, see disclaimer in the right margin of this blog.) Perhaps the moment of silence itself which took place earlier today is the most important thing that can be said, if one uses that time and other times to consider the enormity of the losses due to the terrorist attacks carried out by hijacking four planes that brought down One and Two World Trade Center, crashed into the Pentagon in Washington, DC and crashed in Shanksville, PA, that fateful day in 2001. Time spent during such a moment of silence and some time spent during the rest of the year can be used in contemplation of whatever is within one's power though one's personal and family life, job, or service to one's country and home town, to help prevent such tragic events in the future, and to protect and rescue those impacted by such events. Here's coverage of memorial events taking place today as noted in the New York Times, Washington Post, and The Daily American of Somerset County, PA.
I remember sitting in a meeting room in the basement of SEC's old headquarters at 450 Fifth St. NW on 9/11/01, in one of the periodic meetings held between SEC staff and FASB staff. (At the time I worked for the SEC.) I remember vividly the information slowly trickling through the building, particularly from those who had television sets in a couple places in the building (since the internet and phones were down). I also remember many of the people who were in that room and in the building that day, and one thing I'll say is that, although retention of staff is an issue that every organization faces - including the SEC - as noted in the Senate Banking Hearing on the Madoff affair yesterday, I know there are numerous exceptional people who were at the SEC in 2001 and are still there today, or are at the PCAOB today, or FASB today, serving investors and the capital markets. Moreover, I'd like to give a shout-out to all the folks who risk their lives as police, fire and emergency workers, those are the real heroes.
Remembering 9/11 puts into perspective what really counts, and regardless where we stand on issues like Sarbanes-Oxley, or fair value accounting, it's important to remember there's more that brings us together than tears us apart.
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