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Conference Committee Approves Sarbanes-Oxley 404(b) Exemption

On June 16, 2010, the conference committee reconciling the House and Senate versions of the federal financial reform bill agreed to include in the final reform legislation the House provision that provides an exemption on compliance with Sarbanes-Oxley Act (SOX) Section 404(b) for companies with less than $75 million in market capitalization.

Under the provisions of SOX 404, publicly reporting companies and their independent auditors are each required to report on the effectiveness of internal control over financial reporting.  Section 404(a) requires all public companies to assess the effectiveness of their internal control over financial reporting, while Section 404(b) requires independent auditors to report on management’s assessment.  On October 2, 2009, the Securities and Exchange Commission (SEC) granted its latest deferral for compliance with SOX 404(b), providing non-accelerated filers, those companies with a public float below $75 million, with a reprieve from the auditor attestation until annual reports for fiscal years ending on or after June 15, 2010 are filed.  At the time of that deferral, the SEC was adamant that it would not be granting any further extensions for compliance with SOX 404(b).

The inclusion of the exemption in the final reform legislation would permanently exempt the auditor attestation requirement and significantly reduce the anticipated compliance burdens of smaller reporting companies.  Disclosure of management attestations on internal control over financial reporting would continue to be required for smaller reporting companies.

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SEC Extends Deadline for Sarbanes-Oxley 404(b) Compliance

On October 2, 2009, the Securities and Exchange Commission (SEC) announced a nine-month deferral on Sarbanes-Oxley Act (SOX) Section 404(b) compliance for the smallest publicly reporting companies. Under the provisions of SOX 404, public companies and their independent auditors are each required to report on the effectiveness of company internal controls.  All publicly reporting companies are currently required to disclose a report on management’s assessment of internal controls; however, only reporting companies with a public float of $75 million or above are required to disclose an attestation report provided by an independent auditor.  The extension granted by the SEC will provide non-accelerated filers, those companies with a public float below $75 million, with a reprieve from independent auditor attestations until annual reports for fiscal years ending on or after June 15, 2010 are filed.  Although the SEC has not published the final rule providing for the extension, based on prior extensions, we believe the extended deadline only applies to independent auditor attestations.  Consequently, disclosure of management attestations on internal control continues to be required.

Prior to the October 2 announcement, the deadline for the independent auditor disclosure in annual reports for the smallest publicly reporting companies was fiscal years ending on or after December 15, 2009.  The previous extension, granted in January 2008, was put in place to allow the SEC’s Office of Economic Analysis to complete a study of whether additional guidance provided to company managers and auditors in 2007 was effective in reducing the costs of compliance.  This study was published recently, less than three months before the December 15 deadline, and, as a result, the SEC determined that additional time was appropriate and reasonable so the smallest publicly reporting companies and their auditors could better plan for the required attestation.

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