SEC Offers Relief to Smaller Public and Newly Public Companies from Internal Control Requirements of Sarbanes-Oxley
September 2006
In its effort to improve the implementation of internal control requirements mandated by Section 404 of the Sarbanes-Oxley Act, on August 9, 2006 the Securities and Exchange Commission issued two releases to grant smaller public companies and newly public companies further relief from full compliance with Section 404.1 In May of 2006, the Commission announced that it intended to take several actions aimed at improving the implementation of Section 404 internal control requirements,2 and the recent releases are consistent with such announcement.
In particular, the recent releases provide the following relief related to Section 404’s internal control requirements:
Smaller Public Companies
The Commission proposed an additional extension for smaller public companies to comply with Section 404 internal control over financial reporting requirements.3 Under Section 404(a), issuers must provide a management report that assesses the effectiveness of its internal control over financial reporting. The proposed extension by the Commission will postpone for five months the date by which smaller public companies must provide such management report. Therefore, smaller public companies need not comply until they file an annual report for a fiscal year ending on or after December 15, 2007, provided no further changes are made as a result of the 30-day comment period.
In addition, the Commission proposed to extend the date by which the auditor’s attestation report on internal control over financial reporting is required in accordance with Section 404(b). Under the proposed extension, a smaller public company would not need to begin filing the auditor’s attestation report until it files an annual report for a fiscal year ending on or after December 15, 2008.
The Commission stated that such extensions for smaller public companies reflect efforts to make the internal control reporting process more cost efficient and effective.4
Newly Public Companies
Also included in the Commission’s release is a proposed extension regarding Section 404 compliance for newly public companies. Under the proposed extension, a newly public company would not need to begin complying with the requirements regarding internal controls over financial reporting until it files its second annual report with the Commission. The Commission stated that the proposed additional time for compliance by newly public companies aims to “reduce some of the costs that these companies face in their first year as a public company.”5
Summary
The SEC recognizes the cost burdens companies face when implementing the internal control requirements under Section 404 of Sarbanes-Oxley. As such, smaller public companies would be allowed to delay the implementation of the management report on internal controls over financial reporting until the first fiscal year ending on or after December 15, 2007, and to delay the implementation related to filing auditor’s attestation reports until the first fiscal year ending on or after December 15, 2008. The proposed release related to newly public companies delays Section 404 compliance until the company files its second annual report with the Commission. The Commission also granted relief to certain foreign private issuers.
For more information, please contact a member of Fredrikson & Byron’s Securities Group. We would be happy to talk to you in more detail about how these changes impact your company’s situation.
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1 SEC Release Nos. 33-8731; 33-8730A (Aug. 9, 2006).
2 SEC Press Release 2006-75 (May 17, 2006).
3 The Commission uses the term “non-accelerated filer” and in its release, the Commission states that the term refers to an Exchange Act reporting company that does not meet the Rule 12b-2 definition of either an “accelerated filer” or a “large accelerated filer.” See SEC Release No. 33-8731 n.14.
4 SEC Press Release 2006-136 (Aug. 9, 2006).
5 SEC Release No. 33-8731 (Aug. 9, 2006).