SEC Delays SOX 404 Deadline For Some Companies

On Tuesday, Nov. 30, the Securities and Exchange Commission issued an "exemptive order" that would grant certain accelerated filers up to an additional 45 days to include in their 10-Ks internal control reports as required by Section 404 of the Sarbanes-Oxley Act.

The Commission's "exemptive order" applies to accelerated filers that have a fiscal year ending between and including Nov. 15, 2004 and Feb. 28, 2005, and that had a public equity float of less than $700 million at the end of its second fiscal quarter in 2004.

For those affected by the exemptive order, internal control reports will be due to the SEC within 45 days after the company's annual report is due. That would mean, for example, that issuers with a Dec. 31, 2004, fiscal year end would have until May 1, 2005, to file their internal control assessment and auditor attestation. That's because annual reports are due 75 days after the fiscal year end, which is mid-March; 45 days after that is early May.

A Small Group; No Surprise

While the 45-day delay will surely be appreciated by those affected, it still impacts a very small percentage of the overall U.S. equity market capitalization. According to the SEC's order, the Commission expects that accelerated filers with the relevant fiscal year ends and public equity float thresholds exceeding $700 million—which represent approximately 96 percent of the U.S. equity market capitalization—will "be able to complete their internal control work by the existing Form 10-K deadline."

Nicolaisen

The delay was expected for some time. On Nov. 9, SEC Chief Accountant Donald Nicolaisen told Compliance Week that the Commission was considering a delay, possibly for smaller companies that are having difficulty meeting the deadline. "We do hear of a number of instances of companies that are running out of resources or started too late," said Nicolaisen. "If it looks like a large number of companies won't be able to comply, we will consider whether there is some relief we can make available to limited segments of our registrant community."

And last week, Compliance Week reported that SEC Commissioner Roel Campos had confirmed at a Boston-based conference that the SEC was close to a rule delay. "Relief for small business is being looked at," said Campos. "We’re asking questions like, ‘What exemptions are deserved?’ and, ‘If you give too many exemptions, will people take it seriously?’”

“The Commission is sensitive to resource constraints at accounting firms and at smaller public companies, and is taking this step to facilitate the successful and effective implementation of the Section 404 internal control requirements,” said Nicolaisen in making the announcement.

Alan Beller, the director of the Division of Corporation Finance, added that the exemption would “encourage companies to file important information for investors, including audited financial statements, on a timely basis, while providing an appropriate accommodation for internal control reports.”

PCAOB Moves

The Public Company Accounting Oversight Board also met on Nov. 30 to adopt a temporary rule that would permit the delayed filing of auditors’ internal control reports consistent with the SEC's order. The PCAOB's transitional rule would relieve auditors from two provisions of Auditing Standard No. 2 in connection with audits of companies that rely on the SEC's order.

First, the temporary rule would permit auditors to date their reports on management’s assessment of the effectiveness of internal control over financial reporting later than the date of their reports on the financial statements of companies relying on the Commission’s order. The original standard required that the auditor’s report on the financial statements and the report on internal control over financial reporting should be dated the same.

Second, the PCAOB's temporary rule waives a requirement that the auditor's report on the financial statements should include a paragraph that refers to a separate report on internal control over financial reporting.

For complete details, please refer to the actual SEC and PCAOB documents in the box above, right. Also available are the latest SOX 404 FAQs, as well as related regulatory contacts and resources.