More Time for Non-Accelerateds; Hints on IFRS

In a move that surprises nearly nobody, the Securities and Exchange Commission has given its formal blessing to another year’s extension for small companies to comply with the auditor attestation requirement of the Sarbanes-Oxley Act.

The June 20 announcement means non-accelerated filers will be required to provide the attestation reports required under SOX Section 404(b) in their annual reports for fiscal years ending on or after Dec. 15, 2009.

The extension had been in the works since December 2007, when chairman Christopher Cox first proposed it during testimony before the House Small Business Committee. The SEC then proposed the extension at the start of this year, and most SEC watchers had expected the commission to give formal approval sooner or later.

Smaller companies have still had to comply with Section 404(a) starting this year, which requires company management to assess the effectiveness of the company’s internal controls over financial reporting. Larger companies have been subject to both provisions of Section 404 since 2004.

The SEC has also secured approval from the Office of Management and Budget to proceed with data collection for a planned study of the costs and benefits of Section 404 implementation. The study, announced in February, is intended to assess whether reforms to alleviate the burdens of Section 404 compliance are working as intended.

The SEC staff plans to collect data through interviews and a Web-based survey to analyze what drives costs and where companies and investors derive the benefits from Section 404. The results are expected to be available during the just-approved extension period.

Rubenstein

David Rubenstein, a partner at audit firm Weiser, says the smaller companies he sees are “all over the lot” in their 404(b) efforts.

“Some had taken the position that the deferral was definite and had done little about it,” he says. “Others were gearing up, and I think they’re going to slow their efforts because of the deferral. And there are still some who believe that this may never become a requirement.”

Rubenstein says companies seeking to raise capital may forge ahead with Section 404(b) compliance anyway, “because it’s seen as a selling point in the marketplace.”

McLaughlin

Meanwhile, John McLaughlin, a senior managing director at Smart Business Advisory & Consulting, says the smaller companies he sees “are taking it seriously and trying to do the right thing.”

“Most have been moving ahead with the assumption that they’d be performing the assessment of controls anyway, but they recognize that when the auditors provide an opinion next year, it’s probably going to get a bit more costly,” he tells Compliance Week.

Both Rubenstein and McLaughlin say smaller companies are conferring with their external auditors about Section 404 compliance plans, to avoid making a management assertion about controls now, and then having the external auditor reach very different conclusions once Section 404(b) does apply.

“No one wants to come to the end of the year and have their auditor say they didn’t do enough work,” says Rubenstein.

McLaughlin agrees. “Every one wants to avoid surprises next year,” he says. “The external auditors are trying to influence management to look at their controls more closely, to put in better preventive controls, and they’re urging companies to do a sufficient amount of testing.”

The text of the final amendments for the extension of the auditor attestation requirement for smaller companies will be posted to the SEC Website as soon as possible. The amendments take effect 60 days after publication in the Federal Register.

Cox Drops More Hints on IFRS Plans

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EC Chairman Christopher Cox has given Corporate America a few more hints about how the Commission might move to adopt International Financial Reporting Standards.

In a June 23 speech, Cox told a group of corporate directors that he favors a phased-in approach with a period of voluntary adoption, rather than an all-at-once mandate. The United States may “ want to establish a certain date, but one that is sufficiently far off to permit what is likely to be an expensive mandate for U.S. issuers to be comfortably met,” he said.

A gradual move to scrap U.S. Generally Accepted Accounting Principles and adopt IFRS would let the U.S. financial reporting community develop the knowledge and systems necessary, “before a do-or-die switch is required for everyone,” Cox said. A slow move could also reduce costs for filers who wait until a switch is required, he added.

Cox

One approach might be to give issuers in the near term the option of using IFRS as “early adopters,” if doing so would enhance the comparability of their financial statements with others in their industry group, Cox said.

The chairman also tried to distinguish his ideas from the European Union, which replaced many national GAAPs with IFRS “on a crash basis” in 2005. The United States, he said, “has no such constraint.”

“U.S. GAAP is … supported by a reliable infrastructure that would take a good deal of time and expense to replace,” Cox said. “For the U.S. to adopt the Big Bang approach in the near term in the way that Europe did in 2005 seems needlessly risky.”

His remarks come as calls grow increasingly louder for the SEC to state its plans for moving domestic companies to IFRS, now that foreign firms can file using IFRS without a reconciliation to U.S. GAAP.

An updated IFRS roadmap, laying out a detailed plan with milestones, is expected later this summer.

Cox said a new roadmap “is necessary to ensure that accounting firms train their auditors; that issuers begin to examine how to change their information technology systems; and that universities and technical schools update their curricula.”

SEC to Undertake Disclosure Study

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he SEC, which frequently urges the registrants it oversees to improve their disclosures to the public, plans to look at how it can improve the way it receives information from those entities and disseminates that information to the public.

The Commission announced an internal study, dubbed “The 21st Century Disclosure Initiative,” to look at how it gets information from public companies, mutual funds, brokers, and other regulated entities, and how the SEC makes that information available to investors and the markets—with an eye toward using technology to improve the usefulness and timeliness of disclosures.

In a June 23 speech, SEC Chairman Christopher Cox said the goal of the study is to produce a blueprint “for overhauling completely the SEC’s current forms-based system and replacing it with one that truly meets investors’ needs.”

The study, led by former securities lawyer and plain-English expert William Lutz, now an emeritus professor at Rutgers University, will review the SEC’s existing forms and reporting requirements, and consider ways to tailor regulatory requirements for the collection of information to get the best real-time distribution to investors.

The SEC plans to produce a blueprint for future action by the end of the year, and to appoint an advisory committee to review the blueprint and gather public input.

SEC Nominees Clear Senate Committee

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he Securities and Exchange Commission is back at full capacity, just as the agency prepares to tackle some major rulemakings.

The Senate last week confirmed Republican Troy Paredes, a Washington University law professor; Democrat Luis Aguilar of the law firm McKenna, Long & Aldridge; and Democrat Elisse Walter, senior executive vice president at the Financial Industry Regulatory Authority. The three join Republicans commissioners Christopher Cox and Kathleen Casey. Paul Atkins, another Republican commissioner, announced in May that he would step down as soon as a replacement was confirmed.

Aguilar

“The SEC has laid out an ambitious agenda to improve investor protection and financial markets regulation, and a full complement of commissioners will help us achieve those important objectives,” Cox said in a statement.

The SEC’s immediate agenda includes revamping the rules governing credit ratings agencies, updating a roadmap for moving the United States to International Financial Reporting Standards, and mandating the use of interactive data by companies, among other things.

With a full slate of commissioners in place, shareholder activists are likely to renew calls for the SEC to settle the protracted debate over whether shareholders can place director nominations in the proxy statement. Following a controversial vote last year that essentially killed proxy access at least until 2009, Chairman Cox pledged to revisit the issue when all five commissioner seats were filled.

Prior to the confirmation Friday, the agency had been operating with three commissioners, all Republicans, since the departure of Annette Nazareth in January.