United States: SEC Approves One-Year Extension Of Requirement For Auditor Attestation Of Internal Controls For Smaller Public Companies

The Securities and Exchange Commission (SEC) recently approved yet another one-year extension for smaller public companies to comply with Section 404(b) of the Sarbanes-Oxley Act (SOX).

Background

Under Section 404 of SOX and the SEC rules, a public company is required to include in its annual report: (a) management's assessment of the company's internal control over financial reporting, and (b) an attestation report by the company's independent public auditor on the company's internal control over financial reporting. Last year, the SEC clarified that the auditor's attestation report as required by Section 404(b) requires the independent auditor to express an opinion directly as to whether the company maintained effective internal control over financial reporting, rather than an opinion on management's assessment of the company's internal control over financial reporting. By reporting directly on the company's internal control over financial reporting, the auditor's Section 404(b) report communicates the auditor's responsibility in relation to management's process and necessarily conveys whether management's assessment is fairly stated.

Larger public companies are currently required to comply with both Sections 404(a) and (b). However, the SEC has previously extended the deadlines for compliance by non-accelerated filers (generally, companies with public floats of less than $75 million) with these requirements based on a number of reports and recommendations designed to address the potential adverse financial and manpower effects of internal control over financial reporting on these smaller public companies.

One-Year Extension for Auditor's Attestation

While non-accelerated filers were previously required to provide Section 404(b) auditor attestation reports in annual reports for fiscal years ending on or after December 15, 2008, the SEC has now extended the filing date of these reports; these reports are now required to be included in annual reports for fiscal years ending on or after December 15, 2009. However, the extension does not affect the requirement for non-accelerated filers to comply with Section 404(a) of SOX — which requires management to include its assessment of the effectiveness of the company's internal control over financial reporting — with respect to annual reports for fiscal years ending on or after December 15, 2007.

Among other reasons for the one-year extension, the SEC explained that the additional deferral of the auditor attestation requirement for non-accelerated filers would give the SEC additional time to complete its study of the implementation of Section 404(b) and would afford the Public Company Accounting Oversight Board additional time to evaluate the efficiency and cost-effectiveness of Auditing Standard No. 5 of financial reporting audits of smaller companies. The SEC was concerned that, absent the extension, many non-accelerated filers would have incurred independent auditor costs and unnecessary compliance costs before having the benefit of the SEC study.

Temporary Liability Distinction

In addition to the one-year extension for non-accelerated filers to comply with Section 404(b), the SEC also extended amendments for non-accelerated filers that permit management reports not accompanied by an auditor attestation to be considered "furnished" and not "filed" for purposes of liability under the Securities Exchange Act of 1934. The SEC explained that this "temporary liability distinction" is intended to prevent a situation where management makes a conclusion relating to the company's internal control over financial reporting when it files its management report but the company's auditors arrive at a different conclusion in a subsequently filed report, thereby calling into question management's previous assessment. To mitigate this liability, the SEC will continue making this distinction until non-accelerated filers are also required to comply with Section 404(b).

If you have any questions regarding this release, including how it may affect your company, please contact one of the members of the Securities Law Practice Group or the lawyer in the firm with whom you are regularly in contact.

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