Friday, October 2, 2009

SEC Extends Sarbanes-Oxley 404b Deadline for Small Cos

Earlier today, the U.S. Securities and Exchange Commission issued a press release announcing that its Study on SOX Internal Controls (referred to informally as SEC's cost-benefit study) has been published.

The press release also notes that the SEC has decided to extend once again the deadline for small public co's (nonaccelerated filers, defined generally as co's with less than $75 million market cap) to file their first auditor's report on internal controls under Sarbanes-Oxley Section 404b.

Without the extension announced today, small co's would have been required to file their first auditors's report on internal control for fiscal years ending on or after Dec. 15, 2009. Under the extension announced today, the new deadline for small co's to file their first auditor's report on internal control will begin with annual reports of companies with fiscal years ending on or after June 15, 2010.

Small public co's, like their large co. brethren, already have filed their first Management report on internal control under Sarbanes-Oxley Section 404a; only large co's (accelerated filers with over $75 million market cap) have been required to file both the management report (Sarbox 404a) and external auditor's report (Sarbox 404b) on internal control so far.

The rationale for the additional extension of the Sarbox 404b external auditor's report on internal control announced today for small public co's, according to the SEC - as stated in its press release - is as follows [I have added some additional explanatory language in brackets for context]:
The extension [granted by the SEC in 2008, providing an extension for small co's to Dec. 15, 2009] was granted so that the SEC’s Office of Economic Analysis could complete a study of whether additional guidance provided to company managers and auditors in 2007 was effective in reducing the costs of compliance. Because the [SEC's cost-benefit] study was published less than three months before the December 15 deadline, the Commission determined that additional time is appropriate and reasonable so that small public companies and their auditors can better plan for the required auditor attestation.
Companies and their auditors (and bloggers!) will need more time to read the full SEC study to see how its findings can be used to help "better plan for the required auditor attestation."

I found it interesting that the Conclusion to the SEC's study alludes to the possibility of further rulemaking (which, in truth, is always a possibility) in stating:

[T]he evidence from the survey response data shows that the cost of Section 404 compliance decreased following the Commission’s reforms introduced in 2007 and is expected to decrease further based on respondents’ estimates for the fiscal year in progress at the time of the survey. Moreover, the survey participants perceive the reforms to have been a significant catalyst for these changes. This evidence may prove useful in understanding the effects of the 2007 reforms as well as guiding any subsequent regulatory efforts.
I would suspect we will see a final rule, proposed rule, or some kind of exemptive order posted under Regulatory Actions on the SEC's website either later today or in the next few days, to formalize the extension of time for small co's to file their first Sarbox 404b report which was announced in the SEC's press release earlier today.

As noted in this blog last week, once the PCAOB issued its 4010 report on first year implementation of Auditing Standard No. 5, I assumed that issuance of the SEC's cost-benefit study was probably not far behind.

For additional reporting on the subject of small co. implementation of Sarbox 404b, see Sarah Johnson's article published in yesterday (prior to today's SEC's announcement of the extension for small co's) in her Oct. 1 article entitled: Auditor-Small Issuer Controls Spats Seen.

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Anonymous said...

Despite the cost, time after time we hear from CFO's of successful smaller public companies, that when implemented wisely, SOX compliance is not an expense, it’s a smart investment that leads to better management decision-making, better financial performance, less company risk and less personal exposure for executives and Boards.

Many of these have reported profits in 2009 and attributed part of their success to smart compliance... right sized, relevant suggestions and without using a BIG COMPANY approach that has historically over-burdened companies with large costs and inappropriate recommendations.

So although we financial executives need to comply with good internal control governance, please, let's ensure that compliance efforts are right sized, add value and are relevant to the size of a company.

Anonymous said...

The problem is that there are lots of small filers out there who have not and will not comply with 404(a) until compliance with 404(b) is mandatory.

Anonymous said...

The deadline for small filers is better than accelerated or large
They shoudl have less worry
Arthur Mboue, MBA, JD

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