SEC releases re SOX 404 delay

By: Cydney Posner

Following is the link to the SEC press release regarding additional relief from SOX 404 compliance for smaller public companies and many foreign private issuers. Under the proposal, the date for SOX 404 compliance by non-accelerated filers would be extended as follows: a report by management assessing the effectiveness of the company's internal control over financial reporting would be required for fiscal years ending on or after December 15, 2007 and an auditor's attestation report on internal control (SOX 404(b)) would be delayed until the first annual report for a fiscal year ending on or after December 15, 2008. As a result, all non-accelerated filers would be required to complete only the management's portion of the internal control requirements in their first year of compliance with the requirements. The release also notes that, if the SEC has not issued additional guidance for management on how to complete its assessment of internal control in time to be of assistance in connection with annual reports filed for fiscal years ending on or after December 15, 2007, this deadline could be further postponed. Similarly, if revisions to AS 2 have not been finalized in time, the 2008 deadline could also be further postponed.

In the proposing release the SEC repeats its assurance that "management should not fear that a discussion of internal controls with, or a request for assistance or clarification from, the auditor will itself be deemed a deficiency in internal control or constitute a violation of our independence rules as long as management determines the accounting to be used and does not rely on the auditor to design or implement its controls."

The SEC also expressed concerned that a company that files only a management report during its first year of SOX 404 compliance would become subject to more "second-guessing" as a result of the proposed separation of the reports (e.g., the auditor comes to a contrary conclusion in its report filed in the subsequent year and, as a result, the company’s previous assessment is called into question). To address these concerns, the management report is proposed to be "furnished" rather than "filed" for the first year of compliance.

A newly public company (i.e., any company that has become public through an IPO or a registered exchange offer, that otherwise becomes subject to the Exchange Act reporting requirements or a foreign private issuer that is listing on a U.S. exchange for the first time) would not be required to provide either a management assessment or an auditor attestation report until it has previously filed one annual report with the SEC.

As proposed, foreign private issuers would be required to comply with the SOX 404 requirement to include management's report in the Form 20-F or 40-F annual report filed for their first fiscal years ending on or after July 15, 2006. They will not need to comply with the requirement to provide the registered public accounting firm's attestation report until they file a Form 20-F or 40-F annual report for a fiscal year ending on or after July 15, 2007. The same exception regarding "furnishing" of the report would be applicable for the first year of compliance.