Tuesday, August 15, 2006

Small-Cap Reprieve

The much discussed and much needed reprieve for smaller companies from Sarbanes-Oxley appears to be nearer. Last week the Securities and Exchange Commission issued a New Release (Release 33-8731) covering internal controls over financial reporting for non-accelerated filers and newly public companies.

The new release proposes to amend an alphabet soup list of rules to extend the dates for compliance with the internal control requirements mandated by the Sarbanes-Oxley Act. The new deadline for management’s first “Section 404” report would be fiscal year 2008 and the first auditor’s attestation would be required beginning in fiscal year 2009.

The SEC is looking for comments on this proposal. The deadline is September 14, 2006. (Cite File Number S7-06-03 in an
E-mail Message or use the SEC Comment Form.)

I doubt few will protest the rule changes. Perhaps some would like to see the dates extended out another fiscal year or two. A few brave souls might try to argue an exemption for smaller companies from Sarbanes-Oxley. Considering that Sarbanes-Oxley is generally considered to have had a positive effect on corporate behavior and investor confidence, it is doubtful the SEC would make that move.

The proposed rule change seems to be a sure thing. This topic has been discussed at length over the last couple of years and there are numerous
comments already on file, most of which are supportive of the compliance extensions.

Still at issue for some is the definition of non-accelerated filer according to market capitalization and when that measure is taken, i.e. beginning or end of the fiscal year. The SEC advisory committee on small companies drew the line at $700 million for “small” companies. Some have called for the elimination of the auditor attestation on the basis there are a number of elements which contribute to sound internal controls for a smaller company that make the extra auditor attestation unnecessary.

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