SEC Contemplates Extension on Some Internal Control Reviews
Section 404. Just the words are enough to add to the collective stress level of corporate America, as executives scramble to clear the next hurdle brought about by sweeping reforms.
Dow Jones Newswires reported last week that some smaller companies may get an extension on filing internal control documentation-showing they have effective controls in place and have had the controls attested to by an independent auditor. The requirement is covered in Section 404 of the 2002 Sarbanes-Oxley Act.
Speaking last week before the Practising Law Institute's annual securities regulation conference, Donald Nicolaisen the SEC's chief accountant said the SEC is watching the situation closely and will soon decide if extensions are needed. The start date for compliance with the new rules has already been pushed back.
"Hopefully no more (delays) are necessary," he said. "In the next couple of weeks we'll take another tight look at that. We want this to be a successful implementation."
Companies have complained about the cost and challenges of compliance and accounting firms are maxed out as they help clients to comply.
Dow Jones reported that currently, so-called accelerated filers - companies that meet certain thresholds including a public float greater than $75 million - must comply in annual reports for fiscal years ending on or after Nov. 15. Nicolaisen suggested that if there were to be a delay it would affect companies at the lower end of that group.
Smaller businesses, he said, shoulder a "disproportionate share of the costs associated with implementation." Smaller companies below the accelerated filer threshold are not required to comply until after July 15, 2005, Dow Jones reported.
The SEC expects that it will take some time for 404 to become "a smooth, integrated, fully functional process," and Nicolaisen suggested that in the long run it would be worth it.
Documenting, reporting on and evaluating the effectiveness of financial controls "will have a significant impact on the accuracy of financial reporting going forward," he said.
As companies adjust, Nicolaisen said regulators "need to exercise a certain amount of understanding as we work toward what we think will be a very improved financial reporting process."