“The benefits of 404 reports are too important not to do it right,” said William Donaldson, chairman of the Securities and Exchange Commission, in a recent statement on the difficulties faced by smaller companies and foreign private issuers. Most such companies face a July 15 deadline to comply with this particularly nettlesome section of the Sarbanes-Oxley Act; further, many of the smaller businesses have complained that they must shoulder a burden disproportionate to their size.
Behind every SEC statement on Sarbanes-Oxley Section 404, however, is the hue and cry from many larger U.S. public companies already wrestling with the act.
Now they’ll have the opportunity to speak their piece. The SEC will host a roundtable discussion, tentatively scheduled for April, on the implementation of reporting requirements required by Section 404. Representatives from the Public Company Accounting Oversight Board, publicly traded companies, auditors, investors, and other interested parties are expected to participate. The commission will also solicit written feedback and post it on the SEC website.
The commission convenes such roundtable discussions only rarely. One such discussion was called last year after a record number of comment letters were filed following the “proxy access” proposals that would allow certain shareholders to nominate directors. And in May 2003, the SEC held a roundtable to discuss whether to increase its regulation of hedge funds.
“The readiness of the SEC and the PCAOB to learn from the experience of the first year of implementation of Section 404 of the Sarbanes-Oxley Act is essential to our continued fulfillment of the requirements of the act,” said PCAOB chairman William J. McDonough, in an SEC statement.
The SEC statement also acknowledged the additional challenges faced by smaller businesses and foreign private filers. It pointed out that at the request of the commission staff, a task force of the Committee of Sponsoring Organizations anticipates publishing additional guidance this summer to help smaller companies apply the COSO framework. In addition, this year European companies will prepare their first reports using international financial reporting standards (IFRS).
“An appropriate delay for these issuers might be desirable,” said Donaldson, in a statement, “if, by waiting for smaller companies to have better guidance and for foreign private issuers to work through conversion to IFRS, it achieves more effective implementation of the internal control reporting requirements. I have asked the staff to consider recommending to the commission an appropriate delay.”
“If a delay is provided, these companies should use the time to continue documenting and testing their internal controls,” added SEC chief accountant Donald Nicolaisen. “The requirement to report on internal controls will not go away and, if the staff does recommend a delay, we expect that it will be the last time that we do so.”