Memo from the Securities and Exchange Commission to smaller public companies: Ask and ye shall receive … a delay.
The SEC’s decision last week to extend—yet again—the deadline for non-accelerated filers to comply with Section 404 of Sarbanes-Oxley gives small public companies still more time to get their internal controls in order. Equally important, the delay gives the SEC and the Public Company Accounting Oversight Board more time to redesign the rules around Section 404 implementation, which the two agencies promised to do last May. Piece by piece, that effort is falling into place.
Specifically, the SEC proposed extending the date by which non-accelerated filers (those with public floats of less than $75 million) must start providing a management attestation to the effectiveness of internal controls over financial reporting by five months, from fiscal years ending on or after July 15, 2007 to those ending on or after Dec. 15, 2007. What’s more, the deadline for external auditors’ attestations—perhaps one of the sorest points among executives’ distaste for SOX—will be extended to the first annual report for a fiscal year ending on or after Dec. 15, 2008. The SEC also granted relief for certain foreign private issuers and proposed transitional relief for newly public companies.
Cox
In a prepared statement, SEC Chairman Christopher Cox said the actions “continue the Commission’s efforts to be sensitive and responsive to the particular needs of smaller public companies and foreign private issuers, and to minimize the burdens that Section 404 may impose on them.”
The proposed extension would mean all non-accelerated filers would complete only the management’s portion of the internal control requirements in their first year of compliance. Roughly 44 percent of domestic companies and 38 percent of foreign private issuers that file periodic reports are non-accelerated filers, according to the SEC.
The delays also give the SEC much-needed time to procure guidance for corporate executives on how they should assess internal controls. The agency promised such guidance in a public announcement May 17; since then, it has only published a concept release asking for public input on what the guidance should contain. By stalling the compliance deadline five more months, the Commission hopes to put the guidance in executives’ hands well before their Section 404 deadlines arrive.
The SEC will also work with the PCAOB on amending Auditing Standard No. 2, the exacting standard that external auditors now use to measure the effectiveness of internal controls at large companies already complying with Section 404, and will examine the PCAOB’s 2006 inspections to see whether it is encouraging auditors to be more cost-efficient in their reviews of companies’ internal controls.
Rhodes
Michael Rhodes, a partner at the accounting firm Citrin Cooperman, praised the delays as a wise solution to the Section 404 implementation challenges that would be looming without them. “The proposed scenario still requires management to take ownership of their internal controls and to perform the necessary evaluation as originally prescribed, but affords the PCAOB and the auditors an extra year to work out a reasonable approach to attesting to management’s evaluation,” he says. “I think many of us would agree that amending AS2 is part of the overall solution.”
While welcoming the proposed relief, some still say they wish the SEC would do more to ease the burden of 404 for smaller companies.
“In general, we think it’s a good thing, but it would be nice if there were more,” says Geoff Loftus, vice president of the Society of Corporate Secretaries and Governance Professionals. Loftus says he wants the SEC to treat smaller companies “significantly differently because the burden is significantly harder for them.”
EXTENSION
The excerpt below is from the SEC's proposed extension of compliance dates, titled, "Internal Control Over Financial Reporting In Exchange Act Periodic Reports Of Non-Accelerated Filers And Newly Public Companies," published Aug. 9, 2006:
SUMMARY: We are proposing to further extend for smaller public companies the dates that
were published on September 22, 2005, in Release No. 33-8618 [70 FR 56825] for their
compliance with the internal control requirements mandated by Section 404 of the Sarbanes-
Oxley Act of 2002. Pursuant to the proposal, a non-accelerated filer would not be required to
provide management’s report on internal control over financial reporting until it files an annual
report for a fiscal year ending on or after December 15, 2007. If we have not issued additional
guidance for management on how to complete its assessment of internal control over financial
reporting in time to be of assistance in connection with annual reports filed for fiscal years
ending on or after December 15, 2007, this deadline could be further postponed. Under the
proposal, the auditor’s attestation report on internal control over financial reporting would not be
required until a non-accelerated filer files an annual report for a fiscal year ending on or after
December 15, 2008. If revisions to Auditing Standard No. 2 have not been finalized in time to
be of assistance in connection with annual reports filed for fiscal years ending on or after
December 15, 2008, this deadline could also be further postponed.
We also are proposing to provide a transition period for newly public companies before
they become subject to compliance with the internal control over financial reporting
requirements. Under the proposal, a company would not become subject to these requirements
until it previously has been required to file one annual report with the Commission.
DATES: Comments should be received on or before September 14, 2006.
Source
Proposed Extension Of Compliance Dates ("Internal Control Over Financial Reporting In Exchange Act Periodic Reports Of Non-Accelerated Filers And Newly Public Companies")
Comments
Click Here To Submit Comments To The SEC On The Proposed Extention Of Compliance Dates
Richard Brounstein, a member of the SEC’s Advisory Group on Smaller Public Companies, which originally urged the Commission to exempt most non-accelerated filers from Section 404 completely, says delaying the auditor attestation another year “makes a lot of sense.”
Brounstein
“[The] SEC is working on making practical sense out of this,” Brounstein says. He also worries about determining a company’s size in the middle of a fiscal year, which he says “is not realistic.” Instead, he suggests using a company’s value at the start of its fiscal year.
The SEC has long been clear that it will ultimately enforce Section 404 on companies of all sizes, albeit with varying compliance deadlines. Loftus, however, still argues that the Commission ideally should exempt the smallest filers completely, or at the least extend the latest delays to more companies than those with market capitalizations less than $75 million.
“The SEC commissioners have said previously in their remarks that all companies have to be treated the same, but we don’t think one size fits all,” Loftus says.
Other Reforms Proposed
Aside from the deadline extensions, the SEC also proposed a transition period for newly public companies, which would include foreign private issuers listing on a U.S. exchange for the first time.
The SEC proposed amending its rules so that new companies won’t have to provide either a management assessment or an auditor attestation report until they have previously filed one annual report with the SEC, “in recognition of the fact that preparation of a newly public company’s first annual report can be a time- and resource-intensive process.”
“We believe our proposed transition relief for newly public companies should enhance the attractiveness and cost-effectiveness of participating in our markets, both for companies contemplating IPOs and for foreign companies considering listing in the U.S. for the first time, without sacrificing important investor protections,” said John White, director of the Division of Corporation Finance. White said the SEC looks forward to receiving comment on the proposal from “a diversity of interested parties.”
And for foreign private issuers that are accelerated filers—but not large accelerated filers—the SEC extended the deadline for the external auditor attestation requirement by one year, for fiscal years that end on or after July 15, 2007. Foreign issuers must still file management’s attestation over internal controls in their Form 20-F or 40-F annual report for fiscal years ending after July 15, 2006, which they have had to do all along.
The extension of the auditor attestation requirement will be effective on the date that the SEC statement granting the extension is published in the Federal Register. The SEC says it will apply to about 23 percent of the 1,200 foreign private issuers that are subject to Exchange Act reporting requirements. Combined with the extension that non-accelerated foreign private issuers will receive, the SEC says more than 60 percent of all foreign private issuers will receive some measure of relief.
The public will be able to comment on the SEC’s latest extensions and proposals for 30 days once the proposals are published in the Federal Register.
Related proposals, rules and coverage can be found in the box above, right.
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