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SEC Extends Sarbanes-Oxley Section 404b Deadline For Small Cos.

SEC Extends Sarbanes-Oxley Section 404b Deadline for Small Companies
Oct. 2, 2009
FEI Summary


On Oct. 2, 2009 the U.S. Securities and Exchange Commission issued a press release announcing that its

 Study of the Sarbanes-Oxley Act of 2002 Section 404 Internal Control over Financial Reporting Requirements (informally referred to as SEC's cost-benefit study) has been published.

The press release also notes that the SEC has decided to extend, once again, the deadline for small public companies (nonaccelerated filers, defined generally as companies with less than $75 million in market cap) to file their first auditor's report on internal controls under Sarbanes-Oxley Section 404b.


Without the extension announced today, small companies would have been required to file their first auditor's report on internal control for fiscal years ending on or after Dec. 15, 2009. Under the extension announced today, the new deadline for small companies to file their first auditor's report on internal control will begin with annual reports of companies with fiscal years ending on or after June 15, 2010.


Small public companies, like their large-company brethren, already have filed their first management report on internal control under Sarbanes-Oxley Section 404a; only large companies (accelerated filers with over $75 million market cap) have been required to file both the management report (Sarbanes-Oxley Section 404a) and external auditor's report (Sarbanes-Oxley Section 404b) on internal control so far.


The rationale for the additional extension of the Sarbanes-Oxley Section 404b external auditor's report on internal control announced today for small public companies, according to the SEC – as stated in its press release – is as follows [additional explanatory language added in brackets for context]:


The extension [granted by the SEC in 2008, providing an extension for small companies to Dec. 15, 2009] was granted so that the SEC’s Office of Economic Analysis could complete a study of whether additional guidance provided to company managers and auditors in 2007 was effective in reducing the costs of compliance. Because the [SEC's cost-benefit] study was published less than three months before the Dec. 15 deadline, the Commission determined that additional time is appropriate and reasonable so that small public companies and their auditors can better plan for the required auditor attestation.


The SEC's cost-benefit study cited numerous past studies conducted by FEI and others on this topic. Detailed survey results previously published by FEI can be found in the Financial Executives Research Foundations' online bookstore at www.ferf.org.


The Conclusion section to the SEC's study states (in part):


[T]he evidence from the survey response data shows that the cost of Section 404 compliance decreased following the Commission’s reforms introduced in 2007 and is expected to decrease further based on respondents’ estimates for the fiscal year in progress at the time of the survey. Moreover, the survey participants perceive the reforms to have been a significant catalyst for these changes. This evidence may prove useful in understanding the effects of the 2007 reforms as well as guiding any subsequent regulatory efforts.


We believe the SEC will post a final rule, proposed rule or some kind of exemptive order under Regulatory Actions on the SEC's Web site to formalize the extension of time announced in the press release. We will update this Web page to add links to any further items posted by the SEC.


Additional links posted by SEC (check back for updates):

Statement of Commissioner Luis A. Aguilar  


Prepared Oct. 2, 2009 by Edith Orenstein, director, Accounting Policy Analysis and Communications, Financial Executives International (FEI). This summary does not reflect FEI opinion unless specifically noted above.