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Upcoming Events and News
SEC Extends Date for SOX 404 Audit Requirement for Smaller Companies and Plans Survey To Evaluate Costs

By Richard Levychin, CPA
Partner, KBL, LLP
Certified Public Accountants and Advisors

As expected, the SEC has deferred the implementation date for non-accelerated public companies to have their audit of internal controls under Sarbanes-Oxley (SOX) 404(b) until years ending on or after December 15, 2009. This is a one-year extension from the last implementation plan. SEC Chairman Christopher Cox first proposed this one-year delay for small businesses during December 2007 testimony before the House Small Business Committee, and the Commission formally proposed this extension on Feb. 1, 2008.

It\'s intended that the extension, announced June 20, will allow for an assessment of \"cost savings\" under guidance that came out in 2007 for companies and auditors subject to SOX 404. The SEC also announced the approval from the Office of Management and Budget to begin accumulating data for studies of the costs of larger companies now applying the newer guidance. The results of those studies should be available prior to the new implementation date.

The SEC staff\'s cost-benefit study, which was announced in February, is being led by the SEC\'s Office of Economic Analysis with assistance from the Office of the Chief Accountant and the Division of Corporation Finance. The OMB\'s approval on June 19 is an important milestone in the project, as the SEC staff can now begin the collection of data through interviews and other outreach. The staff submitted the study design for OMB review and approval in compliance with the Paperwork Reduction Act of 1995. With OMB approval, and the key financial data for annual reports becoming available to companies this spring, the SEC staff will be moving forward with interviews and a web-based survey as part of its effort to collect real-world data from a broad array of companies and analyzing what drives costs, particularly for smaller companies, and where companies and investors derive the benefits from Section 404.

John W. White, Director of the SEC\'s Division of Corporation Finance, said, \"Over the past few years, the Commission and PCAOB have committed extensive resources to improving the efficiency and cost-effectiveness of the implementation of Section 404\'s requirements, particularly for smaller companies. I am optimistic that this study of real-world data will help further inform our efforts to improve the implementation of SOX 404.\"

The SEC staff\'s cost-benefit study will help determine whether the new management guidance on evaluating the internal controls over financial reporting issued by the Commission in June 2007 and the Public Company Accounting Oversight Board\'s (PCAOB) Auditing Standard No. 5 approved by the Commission in July 2007 are having the intended effect of facilitating more cost-effective internal control evaluations and audits of smaller reporting companies. The study includes gathering new data from a broad array of companies about the costs and benefits of compliance with the Section 404 requirements. The study also pays special attention to those smaller companies that are complying for the first time with the requirements that are currently in effect. Section 404 has two provisions: 404(a) requires company management to assess the effectiveness of the company\'s internal controls over financial reporting, while 404(b) requires an auditor attestation on management\'s assessment. Larger companies, comprising more than 95 percent of the market capitalization of U.S equity securities markets, have been subject to both provisions since 2004.

The extension of the Section 404(b) compliance date for smaller companies is the latest in a series of Commission efforts to help reduce unnecessary compliance costs for smaller companies while preserving important investor protections. In 2007, the SEC issued new guidance for management\'s Section 404 assessment to help companies focus their reviews on the internal control issues that matter most to investors. Companies of all sizes, including smaller companies, are filing their first 404(a) reports this year with the benefit of the new guidance. Furthermore, the SEC and the PCAOB voted unanimously to replace the standard for the 404(b) auditor attestation, which is intended to make the process more efficient. This year, larger companies are filing their first 404(b) reports under the new audit standard.

Note that this delay does not impact management\'s responsibilities under SOX 404(a); which is to provide their assessment on the effectiveness of internal control over financial reporting. Generally, all U.S. reporting public companies are now required to include management\'s report for all years after their initial annual report.

Also, due to the downturn in the markets, some companies that have been accelerated companies will find they are now non-accelerated filers. That will occur if their non-affiliated market float is less than $50 million as of the end of their second quarter (June 30 for calendar year companies). If this happens, they will no longer be subject to the audit under SOX 404(b) until the date noted above.