Recently, the House Financial Services Committee passed H.R. 3817, the Investor Protection Act. The bill includes an amendment, which would permanently exempt small public companies from complying with Section 404(b) of the Sarbanes-Oxley Act of 2002. The bill must still be voted on by the entire House of Representatives, but it is nice to know that there is hope.
As noted in the October 19th blog post by Mark Bailey, the 404(b) requirement for small business issuers is not beneficial in most cases and thus the passing of this act by the House Financial Services Committee is welcome news.
Today, October 2, 2009, the SEC announced that independent audits of internal control over financial reporting has been extended for smaller reporting companies. The press release indicates small companies will now need to be compliant beginning with annual reports for fiscal years ending on or after June 15, 2010.
For certain individuals who have served this great country (thank you by the way) you may be familiar with what is known as the 7Ps (a vet just reminded me that the military version is 6Ps), and I thought it adapted to well to meeting your quarterly, annual, and seemingly non-stop compliance requirements as a public company.
For smaller reporting companies, or probably more fitting – smaller accounting departments, the “7Ps of SEC Accounting Compliance” couldn’t be more critical.
Midway through the third quarter (for calendar year ends) can be a good time to finish the interim reporting season strong and take significant steps towards preparing for year end and the dreaded audit, which by the way includes audits of internal controls over financial reporting for smaller reporting companies.
Since we are talking in 7s – here are 7 things to remember when preparing for your always positive, and happiness inducing audit experience:
- Make sure your auditor is not in denial about the integrated audit requirement for smaller reporting companies. Chances are this will result in an increase of fees. Up front fixed pricing is ideal for budgeting puropses, but this is not the norm for most firms (coincidentally this is something we live by).
- Get familiar with the codification. It begins with the 3 rd quarter for calendar year ends so it is a good time to think about converting your summary of significant accounting policies into the SEC’s favorite “plain English” . The cross reference tool is a great way to shorten the learning curve.
- Accept the fact that integrated audits are required for smaller reporting companies – get prepared and believe the additional paper gathering (documentation) will increase your frustration level.
- If you are a smaller reporting company and obtained any kind of debt or equity financing through anything other than traditional bank financing, now is a good to share the terms with your auditor. The chances are generally high thay you have some complex accounting requirement that usually results in millions of dollars in surprise and meaningless liabilities.
- Don’t forget about the SFAS 157 fair value requirements particularly if you have level 2 and level 3 assets or liabillities. Start documenting and don’t forget about the FSP “clarifications” for SFAS 157 and 115 (corresponding codification).
- Document supportable positions for other new and/or unusual transactions. It seems like, in this market, all new transactions are unusual.
- Spend some time improving the non-financial portion of compliance documents. The SEC provides great reports (report applies to 10-K as well as IPOs) to help avoid your own love letters from Corp Fin.
It appears the time has come for non-accelerated filers to obtain an audit of internal controls over financial reporting from their external auditor, likely in the form on an integrated audit with the filer’s financial statements.
To date, the SEC has not updated its most recent rules release on the requirement for non-accelerated filers to include an attestation report of their independent auditor on internal controls over financial reporting for fiscal years ending on or after December 15, 2009 (with certain exceptions for new registrants).
Recent remarks by both SEC Commissioner Luis Aguilar and SEC Chairman Mary Schapiro seem to indicate no additional extension will be granted, absent the SEC’s on-going cost-benefit study of SOX Section 404 indicating costs significantly out of line with the benefits.
In preparing for obtaining an audit report, which is as of the annual balance sheet date, it is a good idea to be familiar with a couple of different pieces of guidance. The first of which is the COSO ICFR guidance for smaller reporting companies to ensure appropriately designed and implemented controls to detect and prevent material misstatement of financial information. Secondly, to get an idea of the auditor’s approach, review the PCAOB’s Auditing Standard No. 5 and further the PCAOB’s staff views issued January 23, 2009.