Corporate Governance

How the Wall Street Reform Act Impacts Smaller Businesses: Changes to Sarbanes-Oxley § 404 for Smaller Reporting Companies

By J Robert Brown Jr.

Section 404 of the Sarbanes-Oxley Act of 2002, as originally enacted, imposed two requirements on all issuers filing periodic reports with the SEC. First, each issuer filing an annual report with the SEC must state that the issuer's management was responsible for establishing and maintaining adequate internal control over financial reporting and also contain an assessment, as of the end of the most recent fiscal year of the issuer, of the effectiveness of the issuer's internal control structure and financial reporting procedures.(18) The SEC adopted these rules in September 2002 and has amended them several times.(19)

Second, each auditor of an issuer filing reports with the SEC must attest to and report on management's assessment of its internal controls.(20) In rulemaking to date, the SEC has exempted smaller reporting companies(21) from this attestation requirement through fiscal years ended June 15, 2010.(22)

Section 989G of the Act continues the exemption for smaller reporting companies permanently, stating that the attestation requirements 'shall not apply with respect to any audit report prepared for an issuer that is neither a ‘large accelerated filer' nor an ‘accelerated filer''.(23) As a result, smaller reporting companies are no longer subject to the attestation requirement. Based on informal conversations with SEC staff, it appears that the SEC will issue an interpretation in the near future that this applies to companies with fiscal years ended between June 15, 2010, and the date the Act became law.

The Act also requires the SEC to study ways of reducing the burden of § 404(b) compliance on companies with market capitalizations between $75,000,000 and $250,000,000.

Herrick K. Lidstone, Jr., Burns Figa & Will, PC

_____________________________________________________________________________

18 Sarbanes-Oxley Act of 2002, § 404(a).
19 The SEC adopted Rules 13a-14, 13a-15, 15d-14 and 15d-15, and included the certification found in Exhibit 31 as a required exhibit for all annual and quarterly reports in Item 601 of SEC Regulation S-K.
20 This attestation report is specifically required in Item 9A to Form 10-K and Part I, Item 4 of Form 10-Q.
21 'Smaller reporting company' is defined in 1934 Act Rule 12b-2 means an issuer that is not an investment company, an asset-backed security issuer, or a majority owned subsidiary of a parent that is not a smaller reporting company that has a public float of less than $75,000,000 as of the last business day of its most recently completed second fiscal quarter (determined each year).
22 See Item 9A(T) to Form 10-K and Part I, Item 4(T) to Form 10-Q.
23 Section 989G adds subsection (c) to § 404 of the Sarbanes-Oxley Act of 2002 which contains the
exemption from the requirements of § 404(b).?

Full post as published by The Race to the Bottom on July 28, 2010 (boomark / email).