SEC Approves One-Year Extension From Auditor Attestation Requirement For SMEs

by Mike Godfrey, for LawAndTax-News.com, Washington

24 June 2008

The Securities and Exchange Commission (SEC) announced late last week that it has approved a one-year extension of the compliance date for smaller public companies to meet the Section 404(b) auditor attestation requirement of the Sarbanes-Oxley Act.

The SEC also announced on Friday that it had received Office of Management and Budget (OMB) approval to proceed with data collection for a study of the costs and benefits of Section 404 implementation, focusing on the consequences for smaller companies and the effects of the Section 404 auditor attestation requirements.

The results of the study are expected to become available during the extension period.

With the extension, smaller companies will now be required to provide the attestation reports in their annual reports for fiscal years ending on or after 15th December, 2009.

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 1st February, 2008.

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 last week 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 an 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, commented:

"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."

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% of the market capitalization of US 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.

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