The Securities and Exchange Commission has given a large number of companies an additional 45 days to meet a number of the requirements of Section 404 of the Sarbanes-Oxley Act, which guides how auditors report on companies’ assessments of their internal controls.
On November 15, Section 404 became effective for accelerated filers — defined by the SEC as companies with a public float of at least $75 million, that have been subject to periodic reporting requirements for at least 12 months, that have filed at least one annual report, and that are not eligible to use the SEC’s small-business reporting forms. The additional 45 days apply to accelerated filers whose fiscal year ends between November 15, 2004 and February 28, 2005, and that had a public-equity float of less than $700 million at the end of the company’s second fiscal quarter in 2004.
The extension applies only to Section 404 requirements; all other information required in annual reports, including audited financial statements, must still be filed on the original due date for the annual reports. The SEC also elaborated that if an accelerated filer or its outside auditor identifies a material weakness in internal control over financial reporting before the annual report has been filed, that disclosure must still be made in the annual report.
SEC chief accountant Donald Nicolaisen told The New York Times that the extension would affect a majority of the 4,000 companies that are required to file the reports this year. According to Nicolaisen, however, the accelerated filers that don’t meet the qualifications for the extension represent approximately 96 percent of the U.S. equity market capitalization; these largest companies, he added, “will be able to complete their internal control work by the existing Form 10-K deadline.”
Nicolaisen told the Times he is concerned that auditing firms may not have enough qualified people to complete their work for smaller companies, since their larger clients are typically a larger priority. He also noted that auditors who find problems at larger companies might delay the completion of those audits, which could in turn could delay the audits of smaller companies.
“The commission is sensitive to resource constraints at accounting firms and at smaller public companies,” said Nicolaisen in an SEC statement, “and is taking this step to facilitate the successful and effective implementation of the Section 404 internal-control requirements.”
The Public Company Accounting Oversight Board, in step with the SEC’s extension, also agreed to delay its rule requiring the filing of auditors’ internal-control reports.
For many accelerated filers, this is the third or even the fourth time that they have received a postponement for complying with Section 404. The implementation date for companies that don’t meet that definition, as well as foreign companies trading on U.S. exchanges, remains July 15, 2005.