As public companies wait to see what action, if any, the Securities and Exchange Commission will take on recommendations proposed by its Advisory Committee on Smaller Public Companies, SEC Chairman Christopher Cox told lawmakers the agency’s preference is to find a way to make the controversial internal controls provisions of Section 404 work rather than to grant exemptions wholesale to smaller public companies.
Cox, who testified before the Senate Committee on Banking, Housing, and Urban Affairs last week, told the panel, “It’s not a question of whether to apply it [404], but how,” according to published reports.
His remarks came two days after the Advisory Committee submitted its final report. The Committee recommended 33 proposals, the most contentious being that most smaller companies be exempted from some or all of the provisions of Section 404.
The SEC has not indicated when it will act on the Committee’s recommendations, although Cox and at least two other commissioners—Roel Campos and Cynthia Glassman—have all said they prefer not to grant outright exemptions to Section 404.
Cox’s testimony, the recommendations of the SEC’s Advisory Committee on Smaller Public Companies, and the latest Compliance Week coverage can be found in the box above, right.
SEC: XBRL Could Decrease Number Of Forms Cos. Must File
SEC Chairman Christopher Cox continued his push for interactive data in testimony before the Senate Banking Committee last week.
Citing the Commission’s initiative on interactive data as one of four efforts underway to help make the SEC’s mandated disclosures more useful to investors, Cox told lawmakers that the measure could drastically reduce the number of reports public companies have to file with the SEC, as well as the time and expense associated with filing those reports.
The SEC currently has more than 800 different forms, each with its own cover page—a requirement which dates back to when reports were hand-filed. Noting that the cover pages no longer provide useful information to the public or to the SEC, Cox called them “more junk disclosure that no one needs, or wants.”
Cox
“If one goes beyond the cover pages to the entire form, to focus only on the truly unique information in each one, it’s been estimated that instead of the 800 forms now required, the SEC might have need of no more than a dozen,” Cox told the Committee.
Cox said the key to making that simplification happen is “looking at the data on the forms independently from the forms themselves.” Using interactive data, computer codes can tag each piece of information on a report and tell the SEC what it is—operating income, interest expense, and so forth—so that every number in a report or financial statement is individually identified, qualitatively and quantitatively.
“We’d no longer need what we have for domestic issuers today: nine Securities Act registration statement forms, three Exchange Act registration statement forms, two annual report forms, two quarterly report forms, one current report form … and a partridge in a pear tree,” Cox quipped.
Cox said the move to interactive data, formally known as eXtensible Business Reporting Language, represents a “sorely needed upgrade in the SEC’s electronic disclosure regime.”
The SEC moved away from requiring that disclosure documents be filed exclusively on paper with the launch of its Electronic Data Gathering, Analysis and Retrieval system in the 1980s. “But while EDGAR was a great improvement for the 1980s, 20 years is a lifetime in the computer age,” Cox noted. “EDGAR may be electronic, but it isn’t interactive. It doesn’t begin to tap the potential of the Web.”
Cox said today’s EDGAR filings are “really just snapshots of paper reports” stored in electronic form. The information they contain isn’t searchable, “nor can it be used in any of the myriad ways that electronic data now speed around offices, home computers, and the Internet,” he said.
In its effort to promote XBRL, the SEC has offered expedited review of registration statements and annual reports to lure companies to file their financial reports using interactive data under a voluntary filing program. So far, 17 companies have signed on. The Commission will also host a series of roundtables on interactive data this year. The first roundtable is scheduled in June.
GAO: SEC Faces Same Material Weaknesses Again
Any corporate controllers who secretly savor moments of schadenfreude, take note: the SEC’s latest audit of its own internal controls is now publicly available.
A report released last week by the Government Accountability Office concluded that the SEC, which polices the financial reporting and internal controls of public companies, still has material weaknesses in internal controls of its own—for the third year running.
“Our Nov. 15, 2005, report concluded that SEC continues to face the same material weaknesses in internal control that we reported as part of our audit of SEC’s fiscal year 2004 financial statements,” the GAO said.
The weaknesses related to the SEC’s controls over preparing financial statements and related disclosures, recording and reporting disgorgement and penalty activity, and information security. While the GAO noted that the SEC has made “some progress” in resolving the issues, it said the matters remain material weaknesses as of Sept. 30, 2005, and therefore, “increase the risk that misstatements material in relation to the financial statements would not be prevented or detected on a timely basis.”
As of January 2006, however, the SEC had taken action on 13 of the 34 recommendations the GAO had made in its last audit of the $888 million agency.
The GAO also identified other internal control issues that, while not considered material weaknesses or reportable conditions, it believes “warrant management’s consideration.” Among them: responsibilities of the contracting officer’s technical representative, reviewing filing fee calculations, and compliance with the prompt payment act.
In his response, SEC Chairman Christopher Cox said the agency has “redoubled” its efforts to address its internal controls weaknesses in fiscal 2006. “Since the end of last year’s audit, we have taken steps to implement GAO’s recommendations through several actions that are not reflected in your report,” Cox wrote.
SEC Effectiveness Orders Go Electronic
The SEC has announced that starting this month, it will no longer prepare and mail paper effectiveness orders associated with Securities Act registration statements and post-effective amendments.
Beginning May 22, the staffs of the Divisions of Corporation Finance and Investment Management will use the EDGAR system to issue notifications of effectiveness for Securities Act registration statements and post-effective amendments (other than those that are automatically effective). The notifications will be posted to the EDGAR system the morning after a filing is determined effective. The SEC says registrants will still be notified by phone as well that their registration statements or post-effective amendments are effective.
In the press release announcing the change, the SEC said the move is part of efforts to provide “broader and more timely public notice of important Commission actions.”
“We believe that this is a significant step in providing an online picture of a company’s filing history for both registrants and the public,” John White, director of the Division of Corporation Finance, said. “The implementation of this new system will afford members of the public and participants in securities offerings prompt, reliable public confirmation that registration statements are effective.”
After May 22, a list of filings declared effective on the previous business day will be posted on the SEC’s Web site. The effectiveness notices will be distributed as an EDGAR form type called “EFFECT.”
Orders relating to applications for registration as a transfer agent or as a municipal securities dealer, prepared by the Commission’s Office of Filings and Information Services, will also be supplemented by electronic notifications.
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