Waiting For The Next Move On 404

Supporters and opponents alike of giving smaller companies more time to comply with Section 404 of the Sarbanes-Oxley Act are closely watching an attempt by lawmakers to sink the Securities and Exchange Commission’s plans to have those issuers begin phased-in compliance at the end of this year.

Observers are no doubt anxiously waiting to see what, if anything, the Senate—and the SEC—will do following the recent passage by the House of an amendment that would give non-accelerated filers another year to comply with Section 404.

As Compliance Week previously reported, the House voted June 28 by a marging of 267-154 in favor of an amendment introduced by Reps. Scott Garrett, R-N.J., and Tom Feeney, R-Fla. that would delay Section 404 compliance for small businesses for the fiscal year ending Sept. 30, 2008. The current SEC deadline—affirmed at the end of May—calls for companies with market capitalizations under $75 million to comply with the management requirements of Section 404 for fiscal years ending on or after Dec. 15, 2007, and with the auditor attestation requirement a year later.

Most large companies have been required to comply with Section 404 since 2004, at huge cost. Smaller companies have twice been given a reprieve as regulators have tinkered with ways to make implementation less burdensome.

Commission officials, who also in May approved long-awaited interpretive guidance for management on complying with Section 404, have said they won’t delay the deadline again unless a new companion standard for auditors doesn’t win SEC approval. The comment period on that proposed standard, Auditing Standard No. 5, ended July 12. The SEC has said it will act on AS5 by July 27.

The Garrett-Feeney amendment, which was attached to an appropriations bill for the SEC and the White House, went after the SEC’s wallet, prohibiting the Commission from using funds to enforce the requirements of Section 404. The SEC declined comment on the House amendment through a spokesman, who said the Commission “generally doesn’t comment on the appropriations process.” He added that the SEC’s previous statements regarding a delay “are unchanged.”

Turner

“I think it is up in the air as to what happens in the Senate,” says former SEC chief accountant Lynn Turner. He speculates that the amendment’s fate may lie in the hands of Senate banking committee chairman Chris Dodd, D-Conn. If Dodd doesn’t block the amendment, Turner says, “It has at least a 50-50 chance of passing.”

Turner says the legislation is “all about selling votes for campaign funds.” Now that five years have passed since Congress enacted SOX, he says, “There is no compelling reason for Congress to continue to delay requiring companies to comply with the law of the land, other than to raise campaign funds in an election cycle.”

Rep. Barney Frank, D-Mass. and chairman of the House Financial Services Committee, voted against the amendment. Several consumer groups, including the CFA Centre For Financial Market Integrity, also oppose a further extension.

Schacht

“There is no 404 mystery left for [non-accelerated] filers to base another delay,” says CFA Centre managing director Kurt Schacht, who was also a member of the SEC Advisory Committee on Smaller Public Companies. “We agree with the SEC that the time has come, especially given the new guidance.”

Roper

While some proponents of further delays say more must be done to ease the compliance costs that Section 404 would place on smaller companies, Barbara Roper, director of investor protection for the Consumer Federation of America, says smaller companies are already paying a hefty price for not yet complying with 404, in the form of higher audit fees and more frequent financial restatements.

“They’re paying the price now in a form that’s harmful to investors instead of biting the bullet and coming into compliance,” she says.

Others, however, say smaller companies need time to see how the new guidance and rules will work.

Brounstein

“The smaller companies really should have the time to adapt once the larger companies have re-analyzed their approaches following the SEC guidance and AS5,” says Rick Brounstein, executive vice president of Calypte Biomedical Corp. and also a member of the SEC Smaller Company Advisory Committee. “Right now the concept of ‘top-down’ feels more like theory than practice to me. Smaller companies should be able to rely on the experiences and examples of others.”

Brounstein doesn’t expect an additional delay without action by Congress.

Sharman

Paul Sharman, president of the Institute of Management Accountants, says his group also supports another extension. “It is our hope that this amendment has a favorable response by the Senate to protect small businesses,” Sharman told Compliance Week in an e-mailed statement.

The Chamber of Commerce, the American Banking Association, Independent Community Bankers Association, National Taxpayers Union, and the Citizens against Government Waste also lent their support to the measure.

But Jeff Mahoney, general counsel for the Council of Institutional Investors, says that if passed, the Garrett-Feeney amendment “would impair the independence of the Public Company Accounting Oversight Board and would likely have both short- and long-term negative implications for investors and the U.S. capital market system.”

The U.S. Public Interest Research Group, Consumer Action, Consumer Union, and the AARP also oppose the amendment.

House leaders aren’t the only ones pushing to give small companies more time. Senate Small Business and Entrepreneurship Committee chairman John Kerry, D-Mass., and ranking member Olympia Snowe, R-Maine, have written three letters to the SEC this year calling for another extension.

In response to a request to Kerry’s office for a comment on the amendment, Kathryn Seck, a spokeswoman for the Senate Small Business Committee, replied in an e-mail, “Sen. Kerry is evaluating the action by the House of Representatives and looks forward to working with Ranking Member Snowe and others to find appropriate ways to provide small public firms with adequate time to comply with the new Sarbanes-Oxley regulations.”

The amendment follows numerous attempts by lawmakers to secure extra time for non-accelerated filers. On June 14, Garrett introduced HR 2727, a bill to extend the current moratorium for smaller companies by a year. That bill was referred to the Financial Services Committee.