Read A "Final" SOX Delay for Non-Accelerated Filers text version

One South Pinckney Suite 310 Madison, WI 53703 Phone: 608.204.0122 Fax: 608.204.0125

By Ronald Kral, MBA, CPA, CMA Managing Partner of Candela Solutions LLC October 27, 2009

A "Final" SOX Delay

Here we go again ­ welcome to the merry-go-round world of the U.S. Securities and Exchange Commission (SEC). Earlier this month, the SEC issued a press release (#2009-213) announcing a final stage of Section 404 of Sarbanes-Oxley (SOX). This final stage effectively defers the auditor attestation requirement, Section 404(b), of internal control over financial reporting (ICFR) from fiscal years ending on or after December 15, 2009 to June 15, 2010 for non-accelerated files. Non-accelerated filers are public companies with a public float below $75 million as determined at the end of their second quarter. This is the last group of public companies not fully subject to Section 404. Of course by now we are accustomed to the long parade of SOX-related delays, but this one seems to be packed with an extra punch. SEC Chairman Mary Schapiro states in the press release; "Since there will be no further Commission extensions, it is important for all public companies and their auditors to act with deliberate speed to move toward full Section 404 compliance." It will now be precisely six years after the date of 404(b) compliance was first required of accelerated filers (June 15, 2004) to when it will be required for non-accelerated filers (June 15, 2010). During this time, we have seen an overhauled audit standard, SEC management guidance, various cost studies and numerous articles written on SOX-404. This article takes a deeper look at the recent SEC action and what this means for non-accelerated filers. Understanding the SEC Action There are three documents from the SEC meriting comments on this latest deferral: 1. The SEC's final rule #33-9072 entitled; Internal Control Over Financial Reporting In Exchange Act Periodic Reports Of Non-Accelerated Filers, issued October 13, 2009 (Final Rule): This action effectively amends applicable sections of SEC rules and regulations to put into effect the deferral. This Final Rule states; "We expect that this additional extension of the auditor attestation report requirement will promote capital formation and efficiency by making the implementation process more efficient and less costly for non-accelerated filers by: Providing non-accelerated filers more time to prepare for compliance with the Section 404(b) requirements; and Providing more time for the Section 404(b) audit to be properly planned, scoped and executed." My Interpretation: The long awaited Study (see #2 below) was supposed to come out in late 2008, not late 2009 (see SEC Release #33­8934). The SEC simply ran out of time on this matter as other priorities have kept the new administration busy. They knew this matter was hanging around and had to take action in a definitive manner to once and for all conclude on the expectation of further deferrals.

2. The Study of the Sarbanes-Oxley Act of 2002 Section 404 Internal Control over Financial Reporting Requirements referred to in the SEC Final Rule, dated September 2009 (Study): This 137 pages Study (with appendices) presents an analysis of data from publicly traded companies collected through a survey of financial executives of companies with Section 404 experience conducted during December 2008 and January 2009. The survey data is intended to demonstrate if changes occurring since 2007 (post-reform period of PCAOB AS5 and SEC Management Guidance) are having the intended effect of facilitating more cost-effective internal controls evaluations and audits, especially as they apply to smaller reporting companies. The Study states that "there is an economically and statistically significant reduction in Section 404 compliance costs following the 2007 reforms. This reduction is most pronounced among larger companies." The following table shows the total Section 404 annual costs per the Study survey relative to the 2007 reforms for both larger companies (i.e., those subject to 404(b)) and non-accelerated companies (i.e., those companies who have not been subject to 404(b)). Type of Filer Large Accelerated and Accelerated Filers Large Accelerated and Accelerated Filers Non-Accelerated Filers Non-Accelerated Filers Cost Reference Mean Medium Mean Medium Pre-2007 Reform $2,865,708 $1,192,997 $425,080 $110,900 Post-2007 Reform $2,329,618 $1,037,740 $335,768 $162,000 Next (FY in Progress) $2,030,060 $904,553 $308,735 $139,950

NOTE: Pre-2007 Reform includes firm-fiscal year observations pre-dating November 15, 2007; Post-2007 Reform includes all completed firm-fiscal year observations post-dating November 15, 2007; and "Next" includes all firm observations referring to the fiscal years in progress at the time of the survey.

3. The Statement of Commissioner Luis A. Aguilar Regarding His Commitment to Implementation of Sarbanes-Oxley Section 404(b), dated October 2, 2009 and cited as "additional materials" in SEC press release #2009-213: Commissioner Aguilar addresses the uncertainty among investors and among non-accelerated filers about whether and when compliance with Section 404(b) would actually be required. He says that the SEC action of this deferral resolves the uncertainty by making it clear that all public companies, regardless of size, will be required to comply with Section 404(b) of the Sarbanes-Oxley Act upon this final deferral effective for non-accelerated filers for their first annual report for fiscal years ending on or after June 15, 2010. Practical Implications for Non-Accelerated Filers The on-again, off-again audit attestation portion of SOX-404 can be frustrating for smaller public companies. CFOs, Controllers and others have voiced mixed feelings. They don't mind the extra time to prepare for their ICFR audit, but they also acknowledge that the effort has lost steam due to the constant delays and growing skepticism by some managers and board members that 404(b) may never occur for them. The skepticism has hopefully been put to rest thanks to the recent hard-hitting statements by the SEC Chairman and Commissioners. Then again, I have learned to never say "never" when it comes to the SEC. All public companies, including non-accelerated filers, have been subject to SOX-404(a), which is management's assessment and report on the effectiveness of ICFR. For those smaller companies taking 404(a) seriously and following the SEC guidance of a top-down, risk-based approach they should not

A "Final" SOX Delay for Non-Accelerated Filers ­ written by Ronald Kral, Managing Partner

Page 2

have heartburn over 404(b). In fact, many would agree that assessing and reporting on ICFR, at least to the Audit Committee, is a good practice with or without SOX. It simply makes good business sense and indeed many companies were doing this well before SOX. In conclusion, non-accelerated companies that have been complying with 404(a) in substance, not just form, have little to worry about regarding 404(b), now slatted to take effect for most companies in 2010 (will take effect in 2011 for those companies with fiscal years ending from January 1 to June 14). However, for those procrastinators still out there ­ this indeed looks to be the final stage, so be prepared as form over substance will not cut it with your auditors. Auditors will need to see evidential matter and be satisfied that the ICFR is properly designed and operating effectively when they begin rendering opinions on ICFR for non-accelerated filers next year. Ronald Kral is the Managing Partner of Candela Solutions. Ron is also the Lead Partner of the Firm's SEC Compliance Practice and is available to address inquiries. He can be reached at [email protected] Candela Solutions LLC is a new breed of CPA firm building value for clients through strong governance, risk management and compliance services. Visit our website at for more information.

This is an article reprint from the Governance IssuesTM Newsletter, Volume 2009, Number 6, published on October 27, 2009

© 2009 Candela Solutions LLC, One South Pinckney, Suite 310, Madison, WI 53703. Copyright: The Governance IssuesTM Newsletter is meant to be distributed freely to interested parties. However, any use of this article must credit the respective author and Candela Solutions LLC as the publisher. All rights reserved. Use of the newsletter article constitutes acceptance of our Terms of Use and Privacy Policy. To automatically receive the newsletter, go to www.CandelaSolutions/newsletter and register. Or, send a request to [email protected] and we will register on your behalf.

A "Final" SOX Delay for Non-Accelerated Filers ­ written by Ronald Kral, Managing Partner

Page 3


A "Final" SOX Delay for Non-Accelerated Filers

3 pages

Report File (DMCA)

Our content is added by our users. We aim to remove reported files within 1 working day. Please use this link to notify us:

Report this file as copyright or inappropriate


You might also be interested in

The Sarbanes-Oxley Act and Foreign Private Issuers
Impact of Sarbanes Oxley on Mid-Cap Issuers - SEC Small Bus. (K0494081.DOC;1)
Rebuilding the IPO On-Ramp
Form 4567, 2011 Michigan Business Tax Annual Return