Extension of deadline for first compliance with 404(b) 2748

  • The SEC announced that the compliance date for section 404(b) of the Sarbanes-Oxley Act will be extended again. Non-accelerated filers (i.e. issuers with a market cap below 75 million USD) will need to have their first audit of the effectiveness of internal control over financial reporting by their registered public accountant for their first fiscal year ending on or after June 15, 2010.
    The SEC conducted a web-based suvey of issuers to assess the costs and benefits of complying with section 404(a) and (b) of the Sarbanes-Oxley Act in late 2008. According to the professor to which they outsourced the study, the SEC put the analysis of the results on hold for a while. Now the study has been released. However the study did not make any estimates of the cost of complying with section 404(b) for non-accelerated filers. There is plenty of audit fee research and it would not have been difficult to build an audit fee estimation model out of the existing audit fee data from smaller accelerated filers. Although a small number of investors were interviewed they were not presented with the estimated cost of section 404(b) (e.g. as a percentage of net profit before the extra cost) so that they could state whether this reduction in net profit (or interest serving capability) is worth any perceived benefit of more reliable reporting.
    There does not seem to have been an announcement of a commission meeting based on the Government in the Sunshine Act that indicated any discussion of the results of the study and to issue a proposed rule or a final rule to extend the compliance date. Nevertheless chairman Shapiro has stated 'Since there will be no further Commission extensions, it is important for all public companies and their auditors to act with deliberate speed to move toward full Section 404 compliance,. Commissioner Aguilar joined her by stating ‘I join Chairman Schapiro in assuring investors that there will be no further extensions of the compliance deadline.’
    It’s pretty shocking that the chairman of the SEC and at least one other commissioner seem to already jump to conclusions without really having seen a cost estimate for non-accelerated filers as a percentage of net profit to be able to make an informed evaluation whether the cost that is ultimately borne by investors justifies any benefit that would protect those same investors.

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