CFOs Must Still File Internal-Control Certifications, Despite SOX Extension

The chief executive officers (CEOs) and chief financial officers (CFOs) of certain midsize and foreign public companies must still execute and file certifications about their internal controls under Section 302 of the Sarbanes-Oxley Act, even though the Securities and Exchange Commission (SEC) last week gave them an extra year to comply with Section 404, says one of the country's largest corporate governance consulting units.

"Quarterly certifications for Section 302 indicate, among other things, that there have been no material changes in internal controls and that any material weaknesses in internal control have been disclosed," says Anthony Zecca, partner-in-charge of Cohn Consulting Group (CCG). "They require that CEOs and CFOs have a basis for the quarterly assertions they make. Therefore, we are recommending to all of our clients that management, at a minimum, complete a full assessment of their internal control over financial reporting and disclosure controls in 2005, and only postpone to 2006 the actual full testing of the effectiveness of controls."

CCG is a division of J.H. Cohn LLP , a major accounting and consulting firm with more than 125 experienced internal auditors, management consultants and certified public accountants worldwide who help public companies comply with the Sarbanes-Oxley Act.

Positive ROI on Corporate Governance

Glenn Davis, partner-in-charge of corporate governance services for CCG, says that the requirements of the Sarbanes-Oxley Act can have a positive return on investment for businesses that implement them.

"Companies that are in compliance with Sarbanes-Oxley find that good corporate governance makes good business sense," says Davis. "In our experience, such companies have higher employee morale, pay lower interest on their debt, make fewer billing mistakes, get paid faster, and generally are better-run and more profitable.

"Although they now have some breathing room to comply with Section 404 and other provisions of the Sarbanes-Oxley Act, we would encourage midsize companies to complete the work that they've started so they can begin to reap the benefits of their investment."

SEC Grants One-Year Extension

On March 2, the SEC extended to July 15, 2006, the deadline for non-accelerated filers and foreign private issuers to include in their annual reports a report by management on the company's internal control over financial reporting and an accompanying auditor's report. This is a one-year extension from the previously established July 15, 2005 deadline.

Generally speaking, "non-accelerated filers" are U.S. public companies with market capitalization of $75 million or less, and "foreign private issuers" are business entities incorporated or organized outside the United States with more than half of their ownership, management, assets, and/or administration outside the United States.

Despite their smaller size, midsize companies can have more complicated internal control structures than larger multinational corporations, says Davis.

"Many midsize companies have highly diversified revenue systems as a result of acquisitions and roll-ups they've made over the years, and you have to examine and test the internal controls of each one," he says. "In contrast, a larger, global corporation may have only two or three revenue systems."

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