SOX News

Further Delays in Implementing SEC 404 of SOX Act Not in the Best Interest of Investors: Grant Thornton

(Dec 17, 2007)-- In testimony before the House Small Business Committee on Wednesday, December 12th, Securities and Exchange Commission (SEC) chairman Christopher Cox announced his intentions to propose another one-year delay in the effective date for non-accelerated filer (i.e., those with less than $75 million in public market capitalization) to implement Section 404(b) of the Sarbanes-Oxley Act of 2002. Section 404(b) requires the independent auditors of public companies to attest to, and report on, management’s assessment regarding the effectiveness of internal control over financial reporting. The current effective date for Section 404(b) is for fiscal years ending on or after December 15, 2008. If another one-year delay is adopted by the Commission it would move the effective date to years ending on or after December 15, 2009 – nearly five years beyond the original effective date.

Chairman Cox indicated that the proposed delay would give the SEC an opportunity to complete a study of the costs and benefits of Section 404, which he expects to have completed no earlier than June of 2008. His testimony further indicated that the Commission would base its decisions regarding final implementation on the results of this study, thus suggesting that even the December 2009 effective date may not be firm.

Grant Thornton LLP believes that the proposed delay is neither warranted nor prudent for the following reasons:

* Our experience in the marketplace and our discussions with others in the financial reporting profession indicate that few smaller public companies have taken advantage of previous deferrals of the Section 404 effective date to properly prepare for Section 404. As a result, the Commission’s ability to gather accurate cost statistics for smaller companies will be impaired, since few of the companies subject to the study will have fully implemented Section 404.
* There is ample evidence in the marketplace today that Section 404 has substantially improved the quality of financial reporting for those companies that have fully implemented its requirements. The capital markets recognize this fact, with nearly every major investor group – the very people Section 404 was intended to protect – calling for its full implementation.
* Numerous studies have proven that smaller companies have the greatest need for improvement in their internal control systems. The incidents of major internal control weaknesses, financial statement restatements and fraud are all more prevalent in smaller companies.
* The announcement of yet another delay will further bolster smaller public companies’ expectations that Section 404 may never apply to them, thus reducing their willingness to invest any additional effort in evaluating the effectiveness of their internal control systems.

Section 404 of Sarbanes-Oxley says simply that management should (1) be in a position to tell investors that it is responsible for internal control over financial reporting, and (2) perform reasonable procedures to evaluate the effectiveness of those controls. It further indicates that independent auditors should be able to perform reasonable audit procedures to tell investors that, in their opinion, management’s assertions are accurate. Further delays in fully implementing those reasonable expectations are not in the best interest of investors or companies. The time has come for all companies that use the public’s money to give investors the confidence in their financial reporting systems that those investors demand and deserve.

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