One-year Delay on 404 in the Works

SEC Chairman Christopher Cox is asking his fellow commissioners for another one-year reprieve for smaller businesses.

After a year of listening to lawmakers hound him for another delay of the date when small companies must comply with the internal-control provision of the Sarbanes-Oxley Act, Securities and Exchange Commission Chairman Christopher Cox says he plans to supply such a reprieve.

He intends to ask his fellow commissioners to put off for one year the moment when companies with a market capitalization below $75 million comply with Section 404(b), the auditor attestation requirement, he told Rep. Nydia Velazquez, who has been requesting such a decision.

Out of the four-member commission, Cox has at least the support of one fellow Republican, Kathleen Casey, who earlier this week called for a 404 delay. The SEC is short one commissioner following Roel Campos’ departure in the fall.

Without an affirmative vote, smaller publicly traded companies are slated to submit their auditor-attestation reports for fiscal years ending after December 15, 2008.

At Wednesday’s House Committee on Small Business hearing, Cox said smaller companies shouldn’t have to comply at least until the SEC has completed a study on 404 costs, most likely by June 2008. “Unless there is an additional deferral, companies will incur compliance costs before the SEC has the benefit of study and analysis,” Cox said.

In a hearing and through letters, Velazquez had chastised the commission for not providing hard estimates on the cost of complying with 404 and deemed it unfair that smaller companies would have to meet their deadline for providing reports on their internal controls without such data. In 2003, the SEC provided its notoriously low estimate that 404 implementation would cost each company an average of $91,000, a figure exponentially exceeded by many companies in the first few years of compliance.

The delay would also follow a year of regulators praising themselves for quickly pushing through 404 reforms before summer’s end. For the first time, the SEC issued management guidance for following Section 404, after years in which managements adhered to the corresponding internal-control auditing standard as a guideline. Likewise, the Public Company Accounting Oversight Board issued Auditing Standard No. 5, which revamped its previous standard to stress to auditors that they should focus only on issues of materiality. Auditors should concentrate only those key controls that could lead to a material misstatement by their clients, according to the new standard.

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