Small companies received a gift from the Securities and Exchange Commission on Friday — albeit it wasn’t a surprise. As expected, the regulator extended the compliance deadline for small public companies that are required to complete a management assessment of internal controls as prescribed by Section 404 of the Sarbanes-Oxley Act.
Nonaccelerated filers — those companies with a public float of $75 million or less — now have until they file their annual report for fiscal years ending on or after December 15, 2007, to provide the assessment, an extension of five months. Furthermore, the auditor attestation deadline for small companies has been pushed back: nonaccelerated filers will have until they file their annual report for fiscal years ending on or after December 15, 2008, to comply with the attestation requirements. Originally, the deadline for both Section 404 requirements was July 15, 2007.
Many observers expected the commission to announce the new deadlines at its December 13 open meeting. At that meeting, the SEC introduced proposed guidance on Sarbox’s Section 404 that offers small companies “scalable” compliance features. Indeed, the proposed wording enables companies to tailor their compliance efforts based on the size and complexity of their operations, noted SEC chairman Christopher Cox. This was the first guidance on Section 404 the regulator offered since Congress passed the law in 2002.
Smaller companies have complained that Section 404 compliance costs are disproportionate relative to its benefits, so small caps should welcome the deadline extension. “Section 404 plays a critical role for investors and our markets by enhancing the reliability of financial reporting, but its implementation needs to be more efficient and cost-effective for the companies that must comply with it,” says John White, director of the SEC’s corporate finance division.
The extended deadline for the auditor’s attestation also comes with a separate set of concerns. To be sure, absent SEC guidance, companies tended to rely on the Public Company Accounting Oversight Board’s Auditing Standard No. 2 (AS2) for direction regarding an auditor’s attestation to a company’s internal controls. That standard is expected to be revamped in a proposal to be put forth on December 19 by the PCAOB.
While the attestation deadline extension was proposed in August, the latest announcement provides more time for companies to comply. The SEC says the additional time will give small companies and their auditors more time to consider the changes to AS2 and focus on their internal-assessment process in the meantime.
The SEC’s announcement also grants relief to companies new to its reporting umbrella. New public companies and foreign private issuers newly listed on a U.S. exchange will not have to file their Section 404 assessment or attestation reports until they file their first Form 10-K with the SEC.
A chart of the revised compliance dates and final rules is available on the SEC’s Website.