Sarbanes-Oxley SOX 404 Delayed Again For Non-accelerated Filers Overview
• Public companies felt relief when the SEC voted to delay the compliance date for Section 404 of Sarbanes–Oxley.
• Public companies are guided through the Sarbanes–Oxley Section 404 process based on the first year process by the Public Company Accounting Oversight Board (PCAOB) and SEC's releases.
• Investors expressed strong support for Sarbanes–Oxley Section 404 goals but public companies found the requirements costly and demanding.
• Many of the issues addressed were raised at the SEC's Policy Statement and Staff Questions and Answers Roundtable on Implementation of Internal Control Reporting Provisions.
• The SEC guidance is a staff statement on management's report on internal control over financial reporting and is from the Division of Corporate Finance.
• The SEC guidance addresses the purpose of internal control over financial reporting.
• COSO is continuing to develop an internal control framework for smaller public companies.
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Winter 2005
David M. Capodanno CPA
Senior Manager
Public companies that are nonaccelerated
filers felt some breathing
room when the Securities and
Exchange Commission (SEC) voted to delay,
for an additional year, the compliance date
for Section 404 of Sarbanes–Oxley at its
September 21 meeting. The delay includes
foreign private issuers that are not
accelerated.
As stated in the SEC Advisory Committee
resolution, this third delay was issued for a
number of reasons, including the overall cost
of compliance, complexity of the process,
and new guidance. The Public Company
Accounting Oversight Board (PCAOB) and
SEC's releases guide companies through the
Section 404 process based on the first year
process and the Committee of Sponsoring
Organizations of the Treadway Commission
is expected to release additional guidance in
the future.
During May 2005, the PCAOB issued a
Policy Statement and Staff Questions and
Answers, discussing some of the issues raised
during the first year of auditor's
implementation of PCAOB's Auditing
Standard No. 2. Many of the issues
addressed were raised at the SEC's
Roundtable on Implementation of Internal
Control Reporting Provisions, held during
April 2005.
The Policy Statement considered the auditing
practices used in the first year of
implementation that may be ineffective or
inefficient in meeting the objectives of
Auditing Standard No. 2 and issued guidance
to make audits of internal controls more
effective and cost-efficient through
inspections of registered public accounting
firms. At the Roundtable, investors
expressed strong support for Section 404
goals but companies found the requirements
costly and demanding. They also questioned
if the benefits are worth the cost. At the
conclusion, the PCAOB board decided to
issue additional staff questions and answers
to clarify provisions in the standard to reduce
costs. Specifically, auditors should:
- integrate their audits;
- exercise judgment to tailor audit plans to
the risks facing individual audit clients;
- use a top-down approach;
- use the work of others;
- engage in direct and timely
communication with audit clients.
According to the PCAOB, using these approaches should provide for improvements
in the process and cost reductions in the future. The Q&A portion, issued
separately, provides the staff's opinions on the related implementation
issues discussed in the Policy Statement. The PCAOB Policy Statement
and Q&A can be found at www.pcaobus.org.
The SEC guidance is from the Division of
Corporate Finance and is a staff statement
on management's report on internal control
over financial reporting. The statement is
the staff's views on issues raised in the
implementation of Section 404, which was
discussed during the Roundtable
discussions. The statement addresses the
following areas:
- the purpose of internal control over
financial reporting;
- reasonable assurance, risk-based
approach, and scope of testing and
assessment;
- evaluating internal control deficiencies;
- disclosures about material weaknesses;
- information technology issues;
- communications with auditors;
- issues related to small business and
foreign private issuers.
The SEC makes it clear that the principle of the guidance is the responsibility
of management to determine the scope and assessment and to test accordingly.
The full document use to be found at the following site: http://sec.gov/info/accountants/stafficreproting.htm
COSO is continuing to develop an internal
control framework for smaller companies.
A new framework initially scheduled for
release and comments in August, was first
delayed until September, but is now
delayed until further notice.
Many non-accelerated filers, at a minimum, began the process of assessing
internal controls before the delay. For companies that haven't started
implementation, begin the process soon. Developing a long-term plan
with a top-down risk-based approach will limit the number of controls
tested minimizing the cost. For success, the two most critical factors
of the project are that senior management, specifically the CEO, is
involved and sets the proper tone at the top, and that the company
designates, trains and commits qualified resources. The struggle in
the first year will be compliance, understanding the requirements,
and committing the resources necessary to get the job done.
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