SEC Issues Final Rules Providing Smaller and Newly Public Companies Additional Time to Comply with Section 404

In December 2006, the Securities and Exchange Commission (SEC) approved extensions of some of the scheduled compliance dates for Section 404 of the Sarbanes-Oxley Act of 2002. The final action conforms to the proposed extension released for comment on August 9, 2006. Section 404 requires domestic and foreign public companies to include in their annual reports a report of management’s assessment of the effectiveness of the company’s internal control over financial reporting (Management Report) and an auditor’s attestation report with respect to such assessment (Auditor Attestation). The SEC has previously extended the compliance dates for issuers other than large domestic companies. There are now six separate categories of public companies with different compliance dates, as well as a special dispensation for newly public companies.

The reason for the extension is to allow the smaller public companies, which are not yet required to comply with Section 404, additional time to benefit from the initiatives announced by the SEC on May 17, 2006. According to SEC Chairman Christopher Cox, the SEC and the Public Company Accounting Oversight Board are working “to redesign Section 404 implementation in a way that is efficient and cost effective for investors.” Steps include a concept release seeking comment on the variety of Section 404 issues, which was issued by the SEC on July 11, 2006, and the “Guidance for Smaller Public Companies Reporting on Internal Control over Financial Reporting,” also issued July 11, 2006, by the Committee of Sponsoring Organizations (COSO) and its Advisory Task Force. In the releases, the SEC left open the possibility for further extensions depending on the progress of these initiatives.

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