COSO Targets Aug. 15 For Small Company Guidance

The Committee of Sponsoring Organizations of the Treadway Commission is targeting Aug. 15 as the release date for its guidance for smaller companies on how to apply the COSO control framework to current regulatory requirements.

COSO took up its guidance project—Implementing the COSO Control Framework for Smaller Businesses—early this year at the request of the Securities and Exchange Commission. The COSO framework is widely accepted by regulators and professionals as a means of achieving compliance with Sarbanes-Oxley Section 404 requirements to test and document the effectiveness of internal control over financial reporting.

COSO Chairman Larry Rittenberg said the guidance will be exposed for a 60-day comment period before it is finalized and published.

Smaller companies, described by the SEC as non-accelerated filers, are required to begin reporting on internal controls with their first fiscal year ending on or after July 15, 2006. SEC extended the compliance date for smaller companies and non-U.S. companies earlier this year.

Carcello

Joseph Carcello, director of research for the University of Tennessee’s Corporate Governance Center and a member of the COSO task force drafting the new guidance, said the task force is trying to balance concerns about timing and utility. “There’s a tension here,” Carcello said. “We want to get the guidance out as quickly as possible, but on the other hand we want the guidance to be helpful. COSO can’t stop time.”

The SEC describes smaller companies as those with an equity float of $75 million or less. COSO’s project targets companies with sales of less than $200 million, which includes some 5,000 of SEC’s 9,000 registrants, according to COSO.

The guidance focuses exclusively on internal controls, according to Carcello, and to some degree it represents an update of the framework because it addresses regulatory issues that have changed since the original framework was published more than a decade ago. However, he cautioned larger companies against holding hope that the guidance issued for the benefit of smaller companies will not amount to an endorsement of the same approaches for larger companies.

Carcello said the small company guidance will be organized in the same pattern as the original framework around five components—control environment, risk assessment, control activities, information and communication, and monitoring. It will include a number of approaches and examples.

Compliance Week will make additional details available to subscribers as soon as possible.

FASB’s EITF Refers Rent Expense Flap To Staff For Consideration

The recent wave of restatements as a result of lease accounting has raised questions about how companies should account for rent costs incurred during construction of leasehold improvements. The Emerging Issues Task Force of the Financial Accounting Standards Board couldn’t come to a consensus at a recent meeting, and referred the question to FASB’s staff for its consideration, according to PricewaterhouseCoopers.

The SEC staff issued a statement in February clarifying and reiterating lease accounting rules, resulting in dozens of restatements as companies reviewed their books. The Commission said companies had been following different methods of accounting for rental costs incurred when the company had possession over rental property but wasn’t using it for retail space as it underwent renovation or construction; some companies capitalized the cost as part of their investment while others expensed it in the current period.

EITF debated but failed to reach an agreement and removed it from its agenda. PricewaterhouseCoopers said FASB staff members seem inclined to issue a staff position that such rent costs should be expensed as incurred.

Restaurant companies in particular are protesting. Steven Anderson, president and CEO of the National Restaurant Association, defended industry practice of capitalizing rent expense during construction in a comment letter to EITF, saying members “employed accounting that was consistent, long-standing and sanctioned by their auditors, as indicated to us by our membership and evidenced by the steady delivery, year after year, of clean audit opinions.”