SEC Releases Long-Awaited Study on SOX

This week, the U.S. Securities and Exchange Commission ("SEC") released its study on the impacts of section 404(b) of the Sarbanes-Oxley Act ("SOX"). The SEC concluded that section 404(b) which requires an external auditor to issue an opinion on a company's internal control over financial reporting should remain effective for mid-sized companies with a market capitalization of $75 to $250 million. Here is a summary of their conclusion and recommendations:

The work performed by the Staff reinforces our understanding that the costs of Section 404(b) have declined since the Commission first implemented Section 404, particularly in response to the 2007 reforms, that investors generally view the auditor‘s attestation on ICFR as beneficial, and that financial reporting is more reliable when the auditor is involved with ICFR assessments.

1. Maintain existing investor protections of Section 404(b) for accelerated filers, which have been in place since 2004 for domestic issuers and 2007 for foreign private issuers.

2. Encourage activities that have potential to further improve both effectiveness and efficiency of Section 404(b) implementation.

Since the Dodd-Frank Act exempted small companies with a market capitalization less than $75 million from section 404(b), this study should effectively end the debate over Sarbanes-Oxley section 404 requirements. For mid-size companies looking to gain efficiencies in complying with section 404(b), Wheelhouse Advisors can help. Email us at NavigateSuccessfully@WheelhouseAdvisors.com to learn more.

Many Companies Still Not Ready For SOX Audits

In last week's issue of Compliance Week magazine, a startling survey result was disclosed.  It seems that almost two-thirds of the smaller public companies that will be facing an audit of their internal control over financial reporting this year are not fully prepared (see chart below).  While some may be looking for the U.S. Congress to exempt them from compliance (a measure that is currently being discussed on Capitol Hill), others may simply be ill-equipped or misdirected.  Here is what was reported in the Compliance Week article.

Of the 210 accountants participating in the recent poll, one-third said their company is less than 25 percent complete in implementing Section 404. Inefficiencies were attributed to problems such as poor training and education in the area of processes and controls, lack of focus on project management and utilizing resources, and a “compliance at all cost” mentality that is focused on effectiveness but not efficiency.

At a recent conference of the American Institute of Certified Public Accountants, Elisse Walter, a commissioner for the Securities and Exchange Commission, said the SEC does not support an exemption for smaller companies. “The SEC supports applying 404(b) to smaller companies, particularly as it applies to the financial crisis we’ve seen,” she said. “But now it’s in the hands of Congress.”

Time will tell the outcome of the congressional debate.  However, the companies that are behind schedule should not necessarily hope for a last-minute reprieve.  The best approach is to address the compliance requirements in a business-focused, practical manner that is effective, efficient and ultimately beneficial to the company's long-term well-being.  If your company is looking for cost-effective solutions, visit www.WheelhouseAdvisors.com to learn how we can help.