Center for Audit Quality responds to issues regarding Section 404 compliance

As a result of the current market conditions, Center for Audit Quality (CAQ) member firms have raised questions regarding Section 404 compliance when an issuer exits accelerated filer status and becomes a non-accelerated filer. Specifically, members have inquired as to whether Section 404(b), which is the auditor’s attestation on the effectiveness of internal control over financial reporting, is applicable for issuers that have exited accelerated filer status and have become nonaccelerated filers.

Based on our review of the September 26, 2006 CAQ SEC Regulations Committee discussion document, an issuer that exits accelerated filer status and becomes a non-accelerated filer is not required to comply with Section 404(b) for a fiscal year ending before December 15, 2009.

On September 26, 2006, the CAQ SEC Regulations Committee and the SEC staff met to discuss, among other topics, Section 404 reporting by non-accelerated filers after exiting accelerated filing status. A discussion document entitled Section 404 Reporting by Non-Accelerated Filers After Exiting Accelerated Filing Status, was issued to document the SEC staff’s response. Even though this discussion document is dated September 26, 2006 and does not reflect subsequent changes to the SEC's transition provisions for Section 404, the guidance is still relevant to determining Section 404(b) requirements after exiting accelerated filing status.

To further illustrate the fact pattern and response, we have developed the following example based on the guidance in Discussion Document A and the SEC's current Section 404 transition provisions:

Example:
Company X is a calendar year-end SEC registrant. For its fiscal year ended December 31, 2007, Company X was an accelerated filer and complied with all applicable SEC filings and Section 404 reporting requirements and deadlines. For the fiscal year ending December 31, 2008, Company X will qualify as a non-accelerated filer by virtue of its public float dropping below $50 million as of the last business day of its second fiscal quarter (June 30, 2008). As a non-accelerated filer, Company X is not required to comply with Section 404(b) in its 2008 Form 10-K. However, Company X is still required to comply with Section 404(a) in its 2008 Form 10-K.

Source: Center for Audit Quality

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