03.25.2005

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Updates

SEC Forms Advisory Committee to Examine Effect of Sarbanes-Oxley on Smaller Public Companies

The SEC is forming an Advisory Committee on Smaller Public Companies. The Committee will assess the effect of the Sarbanes-Oxley Act and other securities regulations on smaller public companies and will recommend appropriate changes to the SEC, based on the following objectives:

    • protecting investors;

    • examining whether the current regulations impose costs on smaller companies proportionate to their benefits;
    • identifying methods to minimize costs and maximize benefits; and
    • facilitating capital formation by smaller companies.

Among other things, the SEC expects the Committee to recommend how to vary the regulatory treatment of public companies based on size.

In conducting its work, the Committee will examine the following areas as they relate to smaller public companies:

    • corporate disclosure and reporting requirements;

    • federally imposed corporate governance requirements;
    • accounting standards and financial reporting requirements;
    • frameworks for internal control over financial reporting;
    • methods for management to assess such internal controls;
    • standards for auditing such internal controls; and
    • processes, requirements and exemptions relating to securities offerings, particularly public offerings.

The Committee is expected to operate for approximately 13 months unless the SEC extends or renews its charter.

The SEC has appointed a total of 21 members to the Committee, including the Committee's co-chairs, Herbert S. Wander, a partner in the Chicago office of Katten Muchin Zavis Rosenman and former chair of the American Bar Association's Business Law Section, and James C. Thyen, President and CEO of Kimball International, Inc., a Jasper, Indiana-based manufacturer of furniture, furniture components and electronic assemblies. The SEC selected Committee members with a view to representing fairly and effectively the various interests that the Committee's work may affect. Representatives of three groups,

the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and the North American Securities Administrators Association, have accepted invitations to become official observers of the Committee.

COSO Will Develop Guidance to Help Smaller Public Companies Comply With Sarbanes-Oxley's Internal Control Requirements

In January 2005, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) announced that it will develop guidance to help smaller public companies (those with annual sales less than $200 million) comply with the new internal control requirements of the Sarbanes-Oxley Act. Implementing the COSO Control Framework in Smaller Businesses will not modify or replace COSO's Internal Control - Integrated Framework, which is widely accepted as the internal control standard for companies subject to Sarbanes-Oxley and the Public Company Accounting Oversight Board's Standard 2. The new guidance, however, will include more detail on internal controls and examples of how small companies with fewer resources can comply with the new requirements. COSO expects to make the new guidance available online by the end of June.

In preparing the new guidance, COSO will coordinate its efforts with the SEC's Advisory Committee on Smaller Public Companies. A COSO member is expected to serve on the Committee, and COSO has asked the SEC to provide a delegate to coordinate efforts with the COSO project.

COSO is a private-sector group formed in 1985 and comprises the following members:

    • the American Institute of Certified Public Accountants;
    • the American Accounting Association;
    • Financial Executives International;
    • the Institute of Management Accountants; and
    • the Institute of Internal Auditors.

SEC Permits Delayed Filing of Internal Control Reports by Small Accelerated Filers

In November 2004, the SEC issued an Order permitting certain small accelerated filers to delay filing, as part of their Form 10-K, management’s annual report on internal control over financial reporting and the related attestation report of the registered public accounting firm. The Order applies to any accelerated filer with:

    • common equity held by non-affiliates of less than $700 million at the end of its second fiscal quarter in 2004; and

    • a fiscal year ending between and including November 15, 2004 and February 28, 2005.

A company relying on the Order must file an amended Form 10-K containing the omitted internal control reports within 45 days after the 75-day period specified in Form 10-K.

"Accelerated filers" are companies that:

    • have a public equity float of at least $75 million (based on the market value of outstanding shares held by non-affiliates on the last business day of the second fiscal quarter);

    • have been subject to the Exchange Act's reporting requirements for at least 12 calendar months;
    • previously have filed at least one annual report; and
    • are not eligible to file their quarterly and annual reports on Forms 10-QSB and 10-KSB.

In January 2005, the SEC published FAQs interpreting the Order. The FAQs provide guidance on several issues relating to the implementation and interpretation of the Order including the following:

    • A company that delays the filing of internal control reports in reliance on the Order cannot undertake offerings pursuant to Form S-3 until it has filed its internal control reports. However, Form S-3 will be available for continuous offerings by selling security holders, or offerings that represent dividend reinvestment plans or direct stock purchase plans, in each case commenced before the original due date for the Form 10-K.

    • A company that delays the filing of internal control reports in reliance on the Order may file new registration statements on Form S-2 or S-3, if it is otherwise eligible to use that form, but it cannot request effectiveness of the statement until it has filed its internal control reports.
    • A company that delays the filing of internal control reports in reliance on the Order is eligible to use Form S-8, and persons selling the company's securities are not precluded from relying on Securities Act Rule 144 during the delay in filing.

Although the Order permits an eligible company to delay the filing of its internal control reports, it does not delay the date as of which its management must assess the effectiveness of internal controls, which must still be as of the end of the company's fiscal year.

SEC Extends Compliance Deadlines for Implementation of Internal Control Over Financial Reporting Requirements for Non-Accelerated Filers and Foreign Private Issuers

The SEC again extended the compliance dates for its "internal control" regulations implementing Section 404 of the Sarbanes-Oxley Act as they apply to public companies that are not accelerated filers and to foreign private issuers. Companies in these groups will now be required to comply with these requirements for the first time for fiscal years ending on or after July 15, 2006. For non-accelerated filers and foreign private issuers whose fiscal years end on or after July 15, 2005 and before July 15, 2006, the practical effect of this extension is a one-year delay for when they must first include in their annual reports filed with the SEC:

    • Management's Report on Internal Control Over Financial Reporting in an annual report filed with the SEC (required by Regulation S-K Item 308(a));

    • The related auditor's attestation (required by Regulation S-K Item 308(b)); and
    • CEO/CFO certifications regarding internal controls (required by Exchange Act Rule 13a-14 (and Rule 15d-14)).

The SEC's action also delays when companies must first evaluate whether changes in the company's internal control over financial reporting that occurred during the evaluation period have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting (required by Regulation S-K Item 308(c)).

Additional Information

You can find additional information regarding the Committee on the SEC's website at http://www.sec.gov/news/press/2004-174.htm and http://www.sec.gov/rules/other/33-8514.htm. You can find the SEC's Order and the FAQs on the SEC's website at: http://www.sec.gov/rules/exorders/34-50754.htm and http://www.sec.gov/divisions/corpfin/faq012105.htm. You can find the final rules implementing the SEC's extension for non-accelerated filers and foreign private issuers at http://www.sec.gov/rules/final/33-8545.htm. You can find discussion of other recent laws, regulations and rule proposals of interest to public companies on our website.

 

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