The Second Time Around

Tamping down the Fires
In another seeming attempt to play down controversy, the regulators have structured the roundtable so that the issue sure to generate the most heat — the effects of 404 on small companies — isn't likely to get much of an airing. Smaller companies have complained that the provision isn't "scaled" to fit their specific needs and thus presents them with greater per-unit compliance costs than their bigger peers.

Because the roundtable's purpose, however, "is to review second-year experiences, the discussion will not specifically focus on possible special accommodations or exemptions for companies that have not yet had to comply with the internal control reporting provisions," the PCAOB and the SEC declared in a briefing paper. And since companies with a public float of $75 million or less, called "non-accelerated filers," have until fiscal years ending after July 15, 2007 to start complying with 404, discussion of many small companies' problems would seem to be off limits.

Nevertheless, at least some discussion of the plight of other small issuers is sure to emerge at the event. The regulators themselves seem to have assured that by suggesting this discussion question to participants in the management evaluation and assessment panel: "Are there issues or challenges that are specific to smaller accelerated filers in completing their assessments that might not apply to all accelerated filers?"

Perhaps sensing the possibility for new income streams stemming from a step-down regulatory system, some auditors are likely to champion small companies at the panel. In a comment letter addressed to the regulators, BDO Seidman LLP wrote: "we believe it is essential to develop a right-sized, scalable approach to internal controls that is better suited to the unique needs of the smaller companies while still providing investors with the protection intended by Section 404."

For its part, Deloitte and Touche said in its letter that it also wants "to make compliance with Section 404 reporting requirements cost-effective for smaller businesses." Yet the Big Four firm also said that it strongly opposes the recommendations of the SEC's Advisory Committee on Smaller Public Companies for "broad, permanent" exemptions from 404 reporting for smaller companies or "the adoption of weakened standards requiring reporting only on the design and implementation" of the standard.

Instead, Deloitte suggests a plan to prepare and field test special guidance for smaller companies during 2006 and 2007. As a major auditor, the firm would be sure to have a hand in the project. No surprise: there's gold in them thar hills.

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