THE BASICS

Compliance Dates

"A company that is a non-accelerated filer, or foreign private issuer that files its annual reports on Form 20-F or Form 40-F, must begin to comply with these requirements for its first fiscal year ending on or after July 15, 2006."

Contacts

Sean Harrison, SEC Division of Corporation Finance, (202) 942-2910

Final Rule

Final Rule Related To The Compliance Date Extension

As expected, the Securities and Exchange Commission has again extended the Sarbanes-Oxley Section 404 compliance dates for non-accelerated filers and foreign private issuers.

Under the latest extension, "non-accelerated" filers—generally those with a market capitalization of less than $75 million—and foreign private issuers would have to comply with the internal control provisions of Sarbanes-Oxley for its first fiscal year ending on or after July 15, 2006. That's a one-year extension from the previously established July 15, 2005, compliance date.

The move is not a surprise, as regulators and standard setters had been hinting for months that changes were afoot; as recently as Feb. 7, the Commission had announced that it was considering a delay for small companies and foreign issuers.

On Dec. 16, the SEC announced the creation of an advisory panel to examine the impact of The Sarbanes-Oxley Act and other securities laws on smaller public companies. One month prior, the Public Company Accounting Oversight Board had announced a forum on small business auditing for companies and auditors in the "small business community."

And at a CFO Summit held in November 2004 in Boston, SEC Commissioner Roel Campos confirmed that the SEC was considering a delay of the internal control provisions of Sarbanes-Oxley for smaller issuers. "Relief for small business is being looked at," said Campos.

Then in the new year, COSO announced that it had launched a project to give smaller companies guidance on achieving compliance with new laws and regulations. And on Feb. 7, the SEC announced it would host a roundtable on Section 404 of the Sarbanes-Oxley Act, and would solicit feedback on implementation challenges.

Donaldson

In a speech delivered in late January, SEC Chairman William Donaldson acknowledged that the SEC staff was reviewing a delay to alleviate the pressure on foreign filers. "I have asked the staff of the Commission to consider whether to recommend that we delay the effective date of the internal control on financial reporting requirements for non-U.S. companies," he said. "We will continue to monitor progress in these areas and we are prepared to reach out and engage in an open dialogue to address concerns regarding reporting on internal controls."

The Commission had already extended the original Section 404 compliance dates for all issuers in February 2004.

In making the announcement, SEC Chief accountant Donald Nicolaisen encouraged companies to take the extra time to make sure the requirements are met. "I don't underestimate the effort this will require for smaller companies and foreign private issuers," he said, "but this extension will provide additional time for those issuers to take a good hard look at their internal controls, as the Act contemplates."

The Commission cited its roundtable and the impending COSO guidance for small companies as reasons for the delay, as well as "regulatory and reporting challenges" specific to European Union members. But industry insiders say another unspoken problem might be auditor bandwidth. As Compliance Week reported on Feb. 1, 2005, a shortage of auditors has created a "perfect storm" that has extended beyond the Big Four and is now impacting the second tier of accounting firms. And as auditors have become more selective about clients, it's not uncommon for smaller entities to move down on the priority list—small companies are usually less profitable clients for auditors, and in many cases they represent higher risk.

But the requirements of smaller public companies are just as rigorous as large ones. And that's been especially challenging, not only because small companies usually lack robust finance departments, but because their controls are typically less mature than large organizations.

However, the SEC went out of its way to clarify that its latest delay does not impact the actual requirements of small companies. "The

extended compliance period for non-accelerated filers and foreign private issuers does not in any way alter requirements regarding internal control that are in effect," said the Commission's rule, "including, without limitation, Section 13(b)(2) of the Exchange Act or the rules thereunder."

The rule also recommended that companies not rest on their laurels. "[W]e wish to emphasize that this extension should not be viewed as a basis for smaller companies and foreign private issuers to slow down or delay their Section 404 compliance efforts," wrote SEC Deputy Secretary Margaret McFarland in the final rule. "Smaller companies or foreign private issuers may find that they need all the time available, including the time afforded by this extension, to comply fully with the internal control reporting requirements."

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