Articles on SEC's SOX 404 action plan and new bill on SOX 404

By:  Cydney Posner

An article in the New York Times reports that SEC Chairman Christopher Cox confirmed that all five commissioners had agreed to the decisions announced yesterday, but that "no decision had been made on when those controls [for smaller public companies] would have to be audited. And, he added, there was no consensus on when foreign companies, which have also been permitted to delay compliance with Section 404, would be covered." His comment confirms our interpretation yesterday that, for fiscal years beginning on or after December 16, 2006 (assuming that date sticks), at this point, the SEC would require that smaller public companies provide only the management report, not the auditor's attestation. The WSJ quotes a disappointed member of the SEC's Advisory Committee on Smaller Public Companies putting a happy face on the SEC's action plan: "If indeed they're saying, 'All right, we're not going to do anything with these guys until we get it right,' that's not that different from what we were saying, which was to exempt them until we sort this out," the Committee member is quoted as saying.

The NYT article also mentions the bill introduced yesterday to exempt most companies from SOX 404, which was characterized as "a trillion-dollar problem" that was "outsourcing America's lead in capital markets." Reflecting an acrobatic effort to arrive at a catchy acronym, the bill is called the "Competitive and Open Markets that Protect and Enhance the Treatment of Entrepreneurs Act"-- the COMPETE Act. The bill would allow companies to comply voluntarily with standards that better fit their sizes, instruct the SEC and PCAOB to clearly define ambiguous terms and make it clear that companies conducting an internal audit can receive technical advice from their external auditors. More specifically, the bill would allow certain companies to opt out of SOX 404 compliance, including any company with a market value of less than $700 million, or revenue under $125 million, any company that has been subject to the Exchange Act for fewer than 12 months or was not required to file a 10-K, and any company with fewer than 1,500 "record beneficial holders." If passed, the bill would exempt most public companies from the rule. Companies that cannot or do not opt out would be subject to random external audits administered by the Exchanges, commencing after a company's first internal control report by a registered public accounting firm. Companies would be selected for audit at random by the Exchange on which they are listed. No less than 10% of companies listed on each Exchange would be subjected annually to an external audit. The bill also requires that the material weakness standard be pegged to a de minimus material weakness standard of 5 percent of net profits [?] and provide specific guidelines for "measuring" the terms "reasonable," "significant" and "sufficient," including specific examples, as well as the establishment of a mechanism for the SEC or PCAOB to provide timely guidance upon request by issuers and auditors. The NYT does not expect the legislation to pass this year, but believes that it stands a better chance next year, after the retirements of Sarbanes and Oxley.

The NYT also reports that, yesterday, the PCAOB filed its answer to the complaint filed by the Free Enterprise Fund seeking to have the accounting board deemed unconstitutional. The answer seeks dismissal of the complaint on the grounds that the plaintiff lacked standing and had not followed provisions of the law permitting appeals of PCAOB decisions only after the SEC had rejected an appeal.