The Securities and Exchange Commission has given small companies and foreign companies an extra year to comply with Section 404 of the Sarbanes-Oxley Act.
These companies must now begin to comply with Section 404 — which guides companies’ assessments of their internal controls and auditors’ reports on those assessments — beginning with their first fiscal year ending on or after July 15, 2006, a one-year extension from their previous compliance deadline.
The commission extended the original deadline for all issuers in February 2004. In December, it granted an additional 45 days to accelerated filers whose fiscal year ends between November 15, 2004, and February 28, 2005, and that had a public-equity float of less than $700 million at the end of the company’s second fiscal quarter in 2004.
In addition to foreign companies that trade on U.S. exchanges, the new one-year extension applies to companies that are not accelerated filers. Generally, the SEC restricts that definition to companies with a public float of at least $75 million that have been subject to periodic reporting requirements for at least 12 months, that have filed at least one annual report, and that are not eligible to use the SEC’s small-business reporting forms.
The SEC has received many complaints from a wide range of individuals and companies involved in the process of certifying internal controls, citing the huge demands and costs of complying with Section 404 in general. As a result, the commission recently scheduled a rare roundtable discussion for April 13 to address the issue.
“The Section 404 requirements are among the most important parts of the Sarbanes-Oxley Act, and I encourage public companies to devote the necessary resources to make sure those requirements are implemented effectively,” said SEC Chief Accountant Donald Nicolaisen, in a statement Wednesday. “I don’t underestimate the effort this will require for smaller companies and foreign private issuers, but this extension will provide additional time for those issuers to take a good hard look at their internal controls, as the act contemplates.”
Alan L. Beller, Director of the Division of Corporation Finance, added, “Section 404 reporting has the long-term potential to substantially improve the reliability of financial reporting. It is already having that effect for companies with the vast majority of U.S. market capitalization. Given the burdens in designing and implementing Section 404 compliance for smaller and non-U.S. companies, this extension strikes the right balance. Companies should use the extension not to delay but to improve the quality of their efforts.”
The commission also noted that it has established an SEC Advisory Committee on Smaller Public Companies to help evaluate the effects of current regulations on these businesses. In addition, the Committee of Sponsoring Organizations (COSO) has established a task force to develop new guidance for smaller companies, which it intends to publish this summer.