Thursday, August 12, 2010

Small Co's Relieved of SOX 404(b) Duties, Under Financial Reform Law - GUEST POST by Melissa R. Hoffmann

NOTE: While I am on vacation, I invited some guest posts from popular bloggers. Following is a guest post from Melissa R. Hoffmann, Editor, New York State Society of CPAs, and one of the contributing bloggers on NYSSCPA's CPA Blog.

Owners and auditors of small companies got a gift by way of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which now provides for them a permanent exemption from 404(b) reporting requirements put in place by the 2002 Sarbanes-Oxley Act.

Sarbanes-Oxley, a response to the Enron and WorldCom scandals in 2001, mandated that a publically traded company have an independent auditor attest to management’s assessment of the effectiveness of its internal controls. While large, accelerated filers already comply with this rule, the Securities and Exchange Commission (SEC) repeatedly delayed implementation for smaller companies with public floats of less than $75 million.

Eight years later, that implementation date was still being pushed back—until late 2009, when the SEC went on record saying that there would be no more delays: The smallest companies would be required to obtain the 404(b) attestation for the annual reports of companies with fiscal years ending on or after June 15, 2010.

The commission decided to give that final deadline after the release of a cost-benefit analysis conducted by the SEC showed that smaller companies pay a disproportionately higher cost to comply with 404(b) filing rules but that a significant portion of these costs are non-recurring, with the burden attenuating over time.

But the financial reform bill, signed into law July 21, made that deadline moot. No, there won’t be any more implementation delays. But that’s because there won’t be any implementation at all.

A provision of the financial reform bill—Section 989G—turns these repeated implementation delays into a permanent exemption, saying that the part of Sarbanes-Oxley mandating 404(b) compliance not apply to “non-large, non-accelerated” filers. That particular section of the legislation also requires the SEC to conduct a study examining how best to reduce 404(b) compliance costs for companies with market capitalization between $75 million and $250 million while still maintaining investor protection. The study is to be released to Congress no later than nine months after the bill becomes law.

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Anonymous said...

On July 21,2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law. Section 989G states that non-accelerated filers are now exempt from the requirement of the Sarbanes-Oxley Act’s Section 404(b)—external auditor’s attestation of a non-accelerated filer’s assessment of internal controls over financial reporting. However, for a non-accelerated filer, the following is still intact:

1. Section 404(a) remains in full force—a management assessment of internal controls over financial controls must still be completed annually.

2. The assessment must be performed by both a competent and objective party per SEC guidelines.

3. The assessment must include examining/testing IT controls in addition to financial and accounting controls.

4. Companies must still include a certification of financial controls as part of their annual 10K or 20F statement.

5. SOX Section 302(a) quarterly disclosure controls certification must still be completed.

Edith Orenstein said...


Thanks for the guest post, and Anonymous, thank you for your equally worthy reminder that Sarbox 404(a), the management report requirement, is still intact.

In fact, with so much delay and mixed anticipations about Sarbox 404(b) (the external auditor's report on internal control) for small co's, I would not be surprised if some small co's moved somewhere on the continuum toward implementing 404(b) over the past year and may keep some (but not necessarily all) of those new procedures in place if they believe some of the specific procedures provided more benefit than cost.

Anonymous said...

Have you given any consideration to where smaller reporting companies with a June 30 fiscal year end fall? The October extension ran through June 15, 2010 and Dodd-Frank didn't go into effect until late July. A June 30 filer would fall into the gap and seemingly be subject to the 404(b) requirement.