Companies are cheering the Securities and Exchange Commission’s move to delay the implementation of Sarbanes-Oxley's Section 404 for non-accelerated filers, even as some continue to press the SEC to do more to ease the compliance burden.
In August, the SEC moved to further extend the deadline for non-accelerated filers to comply with Section 404, giving them more time to get their internal controls in order—and also giving regulators more time to amend existing rules for auditors and to develop guidance for management on 404 implementation.
Specifically, the SEC wants to extend the date for non-accelerated filers to start providing management’s attestation to the effectiveness of internal controls over financial reporting to fiscal years ending on or after Dec. 15, 2007 and to extend the date for external auditors’ attestations over internal controls to fiscal years that end on or after Dec. 15, 2008. Newly public companies also wouldn’t have to file any attestations until after they file their first annual report.
The SEC also says those deadlines could be postponed yet again if the Commission does not procure promised guidance for managers early enough to help them with that first year of compliance, or if revisions to Auditing Standard No. 2—the rigorous standard external auditors are using now to assess internal controls—aren’t finished early enough to help with the first round of auditor attestations starting at the end of 2008.
The comment period for the SEC’s proposed extensions closed last week. The majority of submitted comments supported the SEC’s move, although some said they still want the SEC to broaden its compliance relief to include more companies.
Brounstein
Richard Brounstein, chairman of the small public company task force at Financial Executives International, lauded the extensions, but still encouraged the SEC to check its progress at the end of the year “and consider if the proposed extended compliance dates will still be adequate” for companies to implement whatever new guidance and amendments are forthcoming.
Others, including Jon Pexton, vice president of finance and accounting at Callidus Software, want the SEC to extend the transition time to companies like his: non-accelerated filers that will become accelerated filers at the end of the fiscal year. Under present rules, public companies that have a public float that exceeds $75 million for the first time as of June 30 must make the transition to accelerated-filer status for fiscal years ending after Dec. 15 of the same year.
“It appears counter to the spirit and intent of the release that this group … should be required to move forward with the initial adoption of Section 404 prior to receiving the additional guidance for management that the Commission is working on,” he wrote.
Pexton and others contend that companies moving into accelerated-filer status this year should be afforded the same relief proposed for non-accelerated filers, since the SEC said it intended to provide relief to filers that haven’t yet had to comply with Section 404 requirements.
Still others continue to argue that the same rules shouldn’t apply to smaller companies, despite the SEC’s repeated insistence that, sooner or later, all companies will need to comply with Section 404.
“The basic requirements from these companies should not be identical to those of larger or accelerated issuers,” wrote Yacov Kaufman, CFO of IncrediMail Ltd. “Smaller companies do not have the structural complexity requiring such stringent controls, nor do they have the resources required for their implementation.”
SEC’s White: Rely On Your Auditors
Even if small companies win an exemption from filing an auditor’s attestation of their internal controls during their first year of Section 404 compliance, auditors still ought to be an important resource for issuers as they push through Sarbanes-Oxley for the first time, says John White, head of the SEC’s Division of Corporation Finance.
White made the remarks last week in New York at a symposium hosted by the Foundation for Accounting Education. Even as the SEC seems poised to extend the compliance deadline for auditor attestations into 2008, he told the audience, “Your auditors are an important resource whether you file an auditor attestation report or not.”
White said issuers have told the SEC that postponing the auditor attestation would help minimize the cost of SOX compliance for small companies, which have watched with horror as their large-company brethren have endured compliance costs that far exceeded initial estimates for the last three years. Auditor attestations have been faulted widely as the culprit for that cost.
Even if non-accelerated filers aren’t required to file the auditor attestation during Year One—which, for them, will start at the end of 2007—White said companies and auditors should “use the first year to work together to come to a mutual understanding about how internal controls work and to talk about expectations and standards.”
“Use the time to develop communication channels,” White urged. “Whether you’re an auditor, [member of] management, or board member, be open to frank and frequent dialogue and provide each other with constructive feedback. It will make the second year smoother and less burdensome.”
White also noted that the SEC proposed that the management assessment report for non-accelerated filers during Year One be furnished, rather than filed—a move aimed at reducing the liability management might face if the attestations later turn out to be wrong.
New Group Takes Up Anti-SOX Banner
A collection of chief executives, auditors, ex-regulators, and even a former U.S. cabinet member has formed a new industry group that claims it will study the regulatory environment for U.S. capital markets and suggest possible improvements—presumably with Sarbanes-Oxley high on its hit list.
The Committee on Capital Markets Regulation debuted last week, directed by a Harvard University professor and co-chaired by leaders of the Columbia Business School and The Brookings Institution. Its roster boasts CEOs of Big 4 accounting firms, major public companies, investment houses, and more, and has won early endorsement from Treasury Secretary Henry Paulson.
The group promises a report by the end of the November that will make specific recommendations for changes in regulation and legislation that it promises will improve the competitiveness of U.S. markets. The group already has its focus on SOX, shareholder rights, and liability issues affecting public companies, their auditors, and their board of directors.
In a press release, the committee said the report will assess the extent to which the U.S. capital markets are losing ground to foreign or private markets and will study the causes for this decline as well as its effect on the financial sector and the economy as a whole.
Thornton
“There are clear signs that global confidence in our capital markets has been diminished,” John Thornton, chairman of The Brookings Institution and co-chair for the committee, said in a press release. “It is very timely that we seek the creative thinking of some of our country’s leading academics and business professionals.”
Hal Scott, the Harvard professor directing the committee, said the country needs a more principled, risk-based approach to regulation to stem the flow of investor resources toward foreign and private markets.
Beyond the press statements, however, the committee’s objectives remain vague. The American Institute of Certified Public Accountants, the Institute of Internal Auditors, and the Financial Executives International all said they could not comment on the commission. Paulson and Thornton did not respond to Compliance Week’s request for comment. Co-chair Glenn Hubbard, dean of the Columbia Business School, said he was traveling and unable to comment.
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