At the request of subscribers, Compliance Week offers a Remediation Center, in which readers can submit questions—anonymously—to securities and accounting experts. Compliance Week’s editors will review all questions and then submit them—confidentially, of course—to specialists who can address the issues. The questions and responses will then be reprinted in a future edition of Compliance Week. Below is one of the Q&As; ask your own questions by clicking here.

DETAILS

Benoit

Bob Benoit is president/director of SOX Research at Lord & Benoit, a SOX research and compliance firm for small to mid-sized public companies. Benoit serves on the COSO Monitoring Taskforce representing smaller companies. He has also taught “Complying with Sarbanes-Oxley Section 404” throughout the country through the State CPA Societies, and is the author of the “Lord & Benoit Reports,” which have been referenced by Compliance Week, many regulatory agencies, and nearly 200 legal, educational, and trade journals around the world.

Benoit was the first evaluator to use COSO’s “Guidance for Smaller Public Companies” and is the inventor of Virtual SOX taught on the AICPA technology Website. He is a research contributor to the SEC sub-committee, SEC concept releases, and the SEC/PCAOB Internal Control Roundtables.

Benoit may be reached via e-mail at BobB@lordandbenoit.com or online at www.section404.org.

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QUESTION

My company went public in October 2007, and will be subject to our first Section 404 attestations beginning with our 10-K filed on Dec. 31, 2008. We determined we would become an accelerated filer when we calculated our public float on June 30, 2008. (We just went over the $75 million threshold by a few million.)

However, as a result of the downturn, our public float is now $16 million as of November. Under current Securities and Exchange Commission rules, we cannot change status back to non-accelerated filer until June 30, 2009. But in light of guidance from the Center for Audit Quality, would we still be subject to the auditor attestations of Section 404(b)? It appears the answer would be no, but I’d like confirmation of that. Second, given that our auditors are wrapping up their Sarbanes-Oxley compliance work already, will they still issue an opinion if Section 404(b) is deferred? Can we voluntarily have them opine? Please let me know. I have asked our outside counsel to look into this, but your insight would be helpful.

ANSWER

Section 404(a) of the Sarbanes-Oxley Act requires all public companies with fiscal years ending after Dec. 15, 2007, to document tests of internal controls and report the results of those tests. This management assessment of internal control over financial reporting (ICFR) is required to be included in Form 10-K or 20-F. There is an exception, however, if an issuer has not yet filed its first annual report. In the year of IPO filing, the company is exempt from the filing requirements of Section 404. The following year (in this case, fiscal 2008), the company is required to document tests of internal control and report the results under Section 404(a). I make this point because many are still confused over this requirement.

Section 404(b) puts an additional burden on companies: In addition to management’s assessment of internal controls, outside auditors must also do the same. But currently, non-accelerated filers are exempt from Section 404(b) until years ending after Dec. 15, 2009.

Accelerated filers have had to comply with Section 404(b) for several years already. To qualify as an accelerated filer, an issuer must have an aggregate market value of voting and non-voting common equity held by non affiliates—referred to as “public float”—of $75 million or more, as of the last business day of the issuer’s most recently completed second fiscal quarter. In this case, our questioner’s company became an accelerated filer on June 30, 2008, and is subject to Section 404(b) auditor attestation.

There is an exception, however, mentioned in a recent alert from the Center for Audit Quality. It applies to accelerated filers whose public float fell below $50 million as of the last business day of their second fiscal quarter. In that circumstance, a company could then qualify to be a non-accelerated filer for that fiscal year.

The position taken by the Center for Audit Quality (and endorsed by the Securities and Exchange Commission and the Public Company Accounting Oversight Board) is no different than the original positions issued in 2006 to address stock market decreases after a company’s second quarterly report. In our questioner’s case, since the company’s public float was above $50 million at the end of its second quarter, the company would be required to file both Section 404(a) and 404(b) reports.

The next question is that if Section 404(b) is not required, can management elect to have outside auditors express an opinion on internal control over financial reporting anyway? The answer is yes. In fact, not only is the auditor’s attestation permissible; many companies have voluntarily submitted to Section 404(b) since the start of SOX compliance. In this example, since we’re now at the end of 2008, if a company was allowed to report non-accelerated filers status, there is likely to be little auditor cost savings.

Research has found a voluntary submission under Section 404(b) could be advantageous on several grounds: On average, companies with no internal control weaknesses not only have higher share prices, but have greater investor confidence that the information presented is accurate, timely, and complete. This manifests itself primarily in the discount rate used to value companies, which in turn is an important factor in driving value.

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