Breaking News - Small Public Companies must comply with SOX 2615

  • I copy some important developments from the January 2009 edition of the Sarbanes-Oxley Compliance Professionals Association (SOXCPA) newsletter
    a. Breaking news - Mary Schapiro, 53, was approved by the US Senate as head of the Securities and Exchange Commission. Mary Schapiro is the 29th chairman of the SEC.
    There is no doubt: Sarbanes-Oxley compliance becomes more important for the new administration.

    It is clear - Mary Schapiro (Democrat) distances herself from her Republican predecessor Christopher Cox.

    b. Breaking news - Mary Schapiro is very clear: She wants small public businesses to start complying with the internal controls requirement of the Sarbanes-Oxley Act. The publicly traded companies with less than USD75 million are primarily affected.
    Under Christopher Cox, the SEC has granted exemptions that have waived the Section 404 requirement for small businesses. The SEC’s most recent extension gave the freedom to small companies not to disclose audit findings on their internal controls until fiscal years ending on or after Dec. 15.

    Ms. Schapiro said that she wants to work with small businesses to make sure they have the tools to comply with Sarbanes-Oxley.
    Ms Schapiro has worked for two decades regulating financial markets. She was chief executive of the Financial Industry Regulatory Authority that gave Mr Madoff a clean bill of health when they investigated his business. She has distanced herself from Mr Madoff, but she feels the pressure of the Madoff investigation, and we expect that she will be a tough regulator.
    January 2009 - Mary Schapiro writes…

    Questions from Senator Carl Levin for Mary Schapiro - January 8, 2009
    Responses from Mary Schapiro
    'As the events of this past year have made clear, one of the problems with our financial regulatory architecture is that there are large gaps in it, leaving important products and market actors beyond the oversight of regulators.

    Investors deserve to have quality disclosure about all products, actors, and strategies so they can make smart investing decisions, and our markets absolutely require this information, as well as a strong cop on the beat to enforce the rules of the road’

    'It’s important that all the regulators in our system work collaboratively in ensuring that investors are protected and that the markets are operating soundly.

    Moving forward, we need to close the gaps in our regulatory system, a system that is too stove-piped allowing determined market actors to avoid oversight.

    As we work to reform the financial regulatory architecture this should be a priority’
    'The biggest lesson from these market collapses is that we cannot allow financially important products that have a massive impact on our markets and our economy to operate in our system without high standards of oversight, transparency, and accountability.

    As Chair of the SEC, I will move aggressively with my fellow commissioners and working with members of Congress to close the gaps in our regulatory structure and bring these markets under control’
    An important question from Senator Carl Levin

    ‘What needs to be done to resolve the conflicts of interest affecting credit rating agencies?
    What can be done to restore their credibility?’

    Response from Mary Schapiro:

    'As early as 1994, I’ve called for stronger regulation of credit rating agencies when, at that time, it became increasingly clear that their importance to the markets was outstripping the amount of oversight.

    Since then and especially this year, there are real questions about conflicts of interest and transparency that have surfaced.

    Moving forward on credit rating agency reform is a top priority of mine. We need to examine how the rating agencies are compensated, how they manage conflicts of interest, and what role they should play in our markets.

    There are some interesting proposals out there that need to be studied’
    January 2009 - Obama and the new administration
    A new era is born. There is a new administration in Washington DC. As the Democrats control both the White House and the Congress, we can expect a new focus on regulatory compliance.

    The new Law Professor / President started his first day in office with words like transparency and adherence to the rule of law.

  • Interesting times indeed.
    I particularly agree with this comments:
    one of the problems with our financial regulatory architecture is that there are large gaps in it, leaving important products and market actors beyond the oversight of regulators
    That said small companies is probably not a large gap as such :lol:
    Along with transparency I would like to hear the phrase ‘joined up’ a bit more as well.

  • I would not interpret too much into the new president of the SEC’s (i.e. Mary Shapiro’s) answer to questions from Senator Levin that she provided before the confirmation of her nomination.
    The text of her full answer is:
    ‘Regarding, SOX 404, accurate, robust, and easy-to-understand financial reporting – and the internal controls that guarantee it – are critically important to investors and to the efficient functioning of our markets. Right now, we have a system where some issuers are complying with
    404 and others are still exempt from it. It’s time that we bring uniformity to the system so that investors know what to expect from companies, while being sensitive to the needs of small businesses. I look forward to working with the small business community in making sure they have the tools they need to comply with 404.’
    The SEC’s Office of Economic Analysis is currently collecting the internal and external (e.g. increase in audit fees) costs of compliance with section 404 from issuers through an on-line questionnaire after having sent e-mail invitations to participate in the survey.
    If the SEC will then express the cost of compliance for accelerated filers that are just above the non-accelerated filer threshold as a percentage of net profits (before this cost) and if this will be a material amount, she might just as well change her mind about the cost-benefit ratio of section 404(b) audits of internal control.
    In my opinion, there are cheaper alternative regulations to provide an incentive to companies to take internal control over financial reporting seriously and to committ enough qualified staff resources to financial reporting. The SEC could dig out an old proposed rule from the time before the Sarbanes-Oxley Act that would only require non-accelerated filers to disclose any material weakness in internal control over financial reporting that was discovered by the external auditors as part of the normal audit of the financial statements or by the internal auditors. The SEC should extend this by also requiring to disclose any significant deficiency in internal control over financial reporting and any significant adjustment to the financial statements that was discovered by the external or internal auditors. The additional sunlight on problems that are already discovered through a normal audit and known to management through the external auditor’s management letter and through internal audit reports would prevent companies from not taking those problems seriously. In addition, the SEC could lower its standards for the necessary culpability for deficiencies in internal control over financial reporting or for restatements of financial statements due to errors and punish non-accelerated filers for sloppiness in accounting through civil panelties and officer and director bars. That way any sloppy CFO would soon be out of the door.

  • Denis,
    Yes, the phrase ‘joined up’ would be great. Let’s see…
    Thank you for stating so politely not to interpret too much into the new president of the SEC’s … you are right.
    I simply can not resist the temptation… having to work in Basel ii projects changed my focus from the past to the future losses 😉
    The full text - Shapiro’s answer to questions from Senator Levin

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