A key committee of the Securities and Exchange Commission pondering ways to make compliance with the Sarbanes-Oxley Act more palatable planned to meet this week to discuss publishing a draft of its final recommendations.
The SEC’s Committee on Smaller Public Companies was scheduled to meet Tuesday to wrap up its efforts and ready a draft for public comment. The panel, formed to examine the effect of the Sarbanes-Oxley Act and other federal securities laws on smaller public companies, is expected to deliver its final report to the SEC in April.
Results of Tuesday’s meeting were not available at press time. A 30-day comment period is planned once the draft is published in the Federal Register.
The committee’s work has been scrutinized by companies of all sizes, since SEC Chairman Christopher Cox has indicated that the Commission will place significant weight on its recommendations.
The committee approved several non-binding, preliminary recommendations in December, including one that would exempt most public companies from some provisions of Sarbanes-Oxley. Committee members voted to exempt microcap companies—those with both a market capitalization of the lower 1 percent of all public companies (about $100 million to $125 million) and revenue of $125 million or less—from the notoriously labor-intensive Section 404 of SOX. The committee also recommended exempting certain smaller public companies from the external audit requirement of Section 404. To be exempt, companies would have to be in the bottom 6 percent of total market cap (roughly $125 million to $750 million) and have revenues of $250 million or less.
About 80 percent of all U.S. public companies would fall into the “smaller” category. The 20 percent of companies that would remain subject to SOX 404 in its entirety account for about 94 percent of the total U.S. market cap.
The committee further recommended that, if the SEC doesn’t exempt smaller companies from the external audit provision of Section 404, the Commission should direct the Public Company Accounting Oversight Board to develop a new standard for the external-audit requirement for smaller companies. The committee also called for additional guidance and amendments to the PCAOB’s Auditing Standard 2 as needed, and urged the consideration of exemptions for special cases, such as debt-only issuers, biomedical companies and initial public offerings.
Related documents and coverage can be found in the box above, right.
SEC's Cox: Tax GAAP Ensnaring Small, Midsized Companies
Accounting for the provision of income taxes is the culprit behind a large number of material weaknesses uncovered during Section 404 audits of internal controls, SEC Chairman Christopher Cox recently told a group of tax and financial professionals.
Nearly one-third of companies that have reported material weaknesses in their internal controls have determined that at least one weaknesses related to income taxes, Cox said in remarks to the Tax Council Policy Institute on Feb. 9. Only revenue recognition is responsible for more material weaknesses, he added.
Cox
“The burden of dealing with income tax-related material weaknesses falls disproportionately on small and medium-sized companies,” Cox said, noting that 80 percent of the companies with such problems had less than $500 million in revenues. What’s more, he said, the same holds true for all material weaknesses: most companies with material weaknesses of any type also had less than $500 million level in revenues.
Cox, who said he reviewed the data from SEC filings through Dec. 31, 2005, said the most likely cause of material weaknesses reported is an inadequate application of GAAP for income taxes, such as FAS 109; next is inadequate documentation to support the amounts recorded for such things as valuation allowances and foreign subsidiaries, followed by inadequate controls on calculations and reconciliations, and inadequate policies and procedures to review complex or non-routine transactions.
Cox also promised that the SEC will work to fight complexity. “The SEC and the PCAOB must be always willing to improve our approach to the question of internal controls, to take account of what has worked—and also what hasn’t,” he said. “We want to make sure that the rules we have put in place do indeed encourage people to improve their internal controls—and make financial reporting more useful for the people who rely on financial reports… What we’re after is quality and results, not bureaucracy.”
Seeking XBRL Testers; SEC Extends Deadline For Volunteers
The SEC has extended the deadline for companies to join its interactive data test group until March 10, in response to requests for more time from potential participants.
Last month, the SEC unveiled a plan to offer expedited reviews of registration statements or annual reports to entice registrants to volunteer to participate in a test group in which they file their financial information in XBRL, a computer language that makes financial data interactive and easier to compile and process electronically. The incentives were announced roughly nine months after the launch of the voluntary filing program, which drew only nine companies.
The SEC, which claims “several” companies have already signed up to participate, said the extension is in response to “numerous requests from the filing community for additional time for filers and service providers to investigate and prepare for participation” and that it recognizes the demands of year-end reporting requirements.
Companies that want to participate in the test group should contact the individuals listed in the box at right.
SEC Posts Technical Amendments to Securities Act Reform Rules
The SEC has posted a release with technical amendments to the Securities Act Reform rules it adopted in July.
The release contains four correcting amendments to Item 512 of Regulation S-K, and Rules 139, 405, and 433 under the Securities Act.
The changes clarify the safe harbor for issuer specific research reports in Rule 139; apply the Item 512(h) indemnification statement to automatically effective shelfs; amend Rule 433 to clarify that the media accommodations aren’t limited for initial public offerings; and correct a typographical error in the definition of a well-known seasoned issuer.
The full text of the SEC's release, as well as related resources and coverage, are in the box at right.
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