At the Securities and Exchange Commission’s first open meeting since Christopher Cox took the helm as chairman, the Commission voted unanimously to postpone for an additional year the compliance date for filing internal control reports by companies not designated as accelerated filers.

As expected, those smaller companies would have an extra year to comply with Section 404 of Sarbanes-Oxley.

SUMMARY OF PROVISIONS

The SEC last week proposed to redefine accelerated filers, alter the filing deadlines of periodic reports, and postpose for one year the internal compliance date for filing internal control reports by non-accelerated filers. Details of key provisions are below:

Definitions

Large Accelerated Filers—Would create a new category of “large accelerated filers” that have a public float of $700 million or more and meet the same other conditions that apply to accelerated filers.

Accelerated Filers—Would redefine “accelerated filers” as companies that have at least $75 million but less than $700 million in public float.

Filing Deadlines

Large Accelerated Filers—Would be subject to a 60-day 10-K deadline, and a 40-day 10-Q deadline next year and in subsequent years.

Accelerated Filers—Would maintain the current 75-day 10-K deadline, and 40-day 10-Q deadline next year and in subsequent years.

SOX 404 Extension

Would extend for an additional one year the compliance dates regarding its internal control reporting requirements rules for companies that are not accelerated filers:

Non-Accelerated Filers—Under the new compliance schedule, a company that is not an accelerated filer, including a foreign private issuer that is not an accelerated filer, would begin to be required to comply with the Section 404 requirements for its first fiscal year ending on or after July 15, 2007.

Accelerated Foreign Private Issuers—A foreign private issuer that is an accelerated filer and that files its annual reports on Form 20-F or Form 40-F, must begin to comply with the internal control over financial reporting and related requirements in the annual report for its first fiscal year ending on or after July 15, 2006.

Exiting Filer Status

Accelerated Filers—Would modify the procedures by which accelerated filers can exit accelerated filer status by permitting an accelerated filer whose public float has dropped below $25 million to file an annual report on a non-accelerated basis for the same fiscal year that the determination of public float is made.

Large Accelerated Filers—Would similarly permit a large accelerated filer to exit large accelerated filer status once its public float has dropped below $75 million.

Final Rule

Details On The Compliance Dates For Non-Accelerated Filers (SEC, Sept. 22, 2005)

Click Here To Submit Comments On The Extension Of Compliance Dates

Related Coverage

SEC To Vote On Changes To Small Company Rules (Sept. 2005)

Relief On 404, Filing Schedule In Store For Small Cos. (Aug. 2005)

SEC Postpones Final Phase-In For Accelerated Filing (Nov. 2005)

Related Commentary

SEC Revises Filing Deadlines, Defers Compliance Date For Internal Control Requirements (Gibson, Dunn & Crutcher)

SEC Gives Smaller Cos. An Extra Year To Comply With Internal Control Rules (Torys)

SEC Votes To Postpone 404 Compliance For Non-Accel. Filers (Preston Gates & Ellis)

SEC Proposes Accelerated Filer, Reporting Deadline Changes (McGuireWoods)

SEC Extends Internal Controls Reporting Deadline (Dorsey & Whitney)

At its Sept. 21 meeting, the SEC also proposed amendments to the definition of accelerated filer. The Commission also proposed changes to the periodic filing deadlines of accelerated filers, and scrapped them altogether for smaller issuers. Changes to the process by which companies "exit" accelerated filer status also were proposed.

Cox

“The requirements on internal control under 404 have posed the single biggest challenge to companies and the greatest cost,” Chairman Cox noted prior to last week’s vote. However, he emphasized that the Commission is “not backing away from the letter or spirit” of SOX, but will “continue to monitor the impact of the rules.”

“The rules have done their job,” Cox said, noting that the decision to extend the 404 deadline for non-accelerated filers “doesn’t mean failing to apply the law,” rather, he said, it’s a “question of how to apply it.”

The SOX 404 Delay

The extension, which marks the third delay for smaller public companies, means that non-accelerated filers, including foreign private issuers that aren’t accelerated filers, have until their first fiscal year ending on or after July 15, 2007 to comply with the Section 404 requirements. Foreign private issuers that are accelerated filers and that file on Form 20-F or Form 40-F have to comply with the internal control over financial reporting and related requirements in the annual report for their first fiscal year ending on or after July 15, 2006.

In recommending the delay prior to the vote last Wednesday, a statement by the Division of Corporation Finance noted that the extension could help non-accelerated filers “avoid significant costs that may prove ultimately unnecessary.”

The SEC has already twice delayed the 404 compliance date for non-accelerated filers. Last year, the SEC granted an extension for all companies to give them more time to implement Auditing Standard No. 2. In March of this year, the SEC granted a one-year extension for non-accelerated filers and foreign private issuers.

Many accelerated filers—those already required to implement Section 404—have been critical of the tremendous amounts of time and costs—including soaring audit fees—associated with compliance. Smaller companies, meanwhile, have said that the burden of complying with Section 404 would be disproportionately higher for them, since they have less capital and more limited resources than their large company counterparts.

According to Commissioner Cynthia Glassman, recent guidance issued by the SEC and the Public Company Accounting Oversight Board has not produced the intended results: helping companies pare down SOX 404 costs by instilling a "top down, risk-based" approach to the internal control provisions. It was hoped that such an approach would deemphasize documentation and testing of myriad controls that were unlikely to cause a misstatement, but were only being reviewed because auditors were afraid of being accused of lax audits by the PCAOB.

Glassman

“I was hopeful that our guidance issued in May along with the PCAOB guidance would refocus auditors; however, we’re hearing that the 404 process may not be changing for year two,” said Glassman. “Companies and their auditors are still testing tens of thousands of key controls—that makes no sense to me. Perfect controls are not the end game and are likely not worth the cost. We need to get back to the purpose of 404—accurate financial statements, and not controls for controls sake.”

The 404 delay is in line with a recent recommendation by the SEC Advisory Committee on Smaller Public Companies. In August, the 21-member panel recommended that the Commission give smaller public companies another 404 extension, and that the SEC scrap or delay accelerating periodic filing deadlines for those companies.

The SEC said the deferral was warranted by the Committee’s ongoing work, as well as continuing efforts by the Committee of Sponsoring Organizations of the Treadway Commission to develop an internal control framework for smaller public companies. That guidance was originally expected to be released for comment in August, and was later pushed off to mid-September; at press time, the date of issuance had not yet been finalized.

Rhodes

Michael Rhodes, director of the corporate governance practice at New York-based Citrin Cooperman & Co., says non-accelerated filers ought to make good use of the extra time.

“Regardless of the current status of a company’s Section 404 compliance plan, the additional time can be used to develop a long-term plan to achieving compliance that prioritizes the areas with the greatest potential for significant remediation,” says Rhodes. Documentation and remediation efforts can be achieved at “a manageable pace,” and compliance costs can be spread out over a longer term.

“What is important for all companies to recognize is that compliance with Section 404 of the Act does not have to be an end in and of itself,” added Rhodes. “It is a means of instilling corporate governance best practices that will add stockholder value and will serve as a springboard to process improvement.”

Rhodes also said he would “strongly recommend that non-accelerated filers address the deadline extension with their audit committees to determine the best approach to optimizing the time now available.”

Companies, Redefined

At its meeting last week, the SEC also proposed amending the filing deadlines for periodic reports, and changes in the definition of accelerated filers.

Specifically, the SEC proposed changes to the final phase-in of accelerated periodic report filing deadlines for the largest filers, and scrapped them altogether for other filers.

Under the currently planned final phase-in, starting next year, annual report deadlines, which have already been trimmed to 75 days, would be further shortened to 60 days; quarterly report deadlines, which were previously cut to 40 days, would move to 35 days.

FILING SCHEDULE

The table below is courtesy PricewaterhouseCoopers' CFO Direct Network. The existing (assuming the final stage of acceleration is completed as currently scheduled) and proposed filing schedule is summarized as follows:

— Form 10-K —

— Form 10-Q —

Type

Mrkt. CapThreshold

Current*

Proposed

Current*

Proposed

Large Accelerated Filers

$700 million

60 days

60 days

35 days

40 days

Accelerated Filers (That Are Not "Large")

$75 million

60 days

75 days

35 days

40 days

Non-Accelerated Filers

90 days

90 days

45 days

45 days

* Currently, the filing deadlines for all accelerated filers are scheduled to be 60 days for Form 10-K for fiscal years ending on or after December 15, 2005, and 35 days for Form 10-Q for fiscal quarters of fiscal years ending on or after December 31, 2006.

Source: PricewaterhouseCoopers' "CFO Direct Network": SEC Delays SOX Section 404 for Non-Accelerated Filers; Proposes Changes To Definitions, Deadlines

Instead, the SEC proposed the creation of a new category of companies called “large accelerated filers,” defined as companies that have a public float of $700 million or more and that also meet the same other conditions that apply to accelerated filers. Those filers would become subject to a 60-day annual report deadline and a 40-day quarterly report deadline starting next year.

Meanwhile, the definition of accelerated filers would be redefined as companies that have at least $75 million but less than $700 million in public float. Those filers would maintain the current 75-day Form 10-K annual report deadline and 40-day Form 10-Q quarterly report deadline.

During the meeting Cox noted that large companies have faced a “double whammy” of faster reporting deadlines, coupled with increased audit and disclosure requirements under Sarbanes-Oxley. Still, he noted that “most companies have filed their reports on time under the deadlines as they exist today.”

Exiting Made Easier

The SEC also proposed easing the restrictions on the process for exiting accelerated filer status. Under the proposed amendments, an accelerated filer whose public float has dropped below $25 million would be permitted to exit accelerated filer status by filing an annual report on a non-accelerated basis for the same fiscal year that the determination of public float is made. Similarly, a large accelerated filer would be able to exit large accelerated filer status once its public float has dropped below $75 million.

Comments on the proposed amendments should be received by the Commission within 30 days of their publication in the Federal Register.

Meanwhile, the Commission said it is seeking public comment on several questions about the application of the internal control reporting requirements, including questions regarding the amount of time and expense that companies that are not accelerated filers have incurred to date to prepare for compliance with the internal control reporting requirements. Comments should be received by the Commission within thirty days of the publication of the proposals in the Federal Register. Details can be found in the box above, right.

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