Document ID: SEC-2005-0046-0001
Agency: sec
Document Type: Rule
Title: Managements Report on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports of Companies That Are Not Accelerated Filers
Posted Date: 2005-09-29T04:00Z

[Federal Register: September 29, 2005 (Volume 70, Number 188)]
[Rules and Regulations]               
[Page 56825-56828]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29se05-7]                         

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 210, 228, 229, 240 and 249

[Release Nos. 33-8618; 34-52492; File Nos. S7-40-02; S7-06-03]
RIN 3235-AI66 and 3235-AI79

 
Management's Report on Internal Control Over Financial Reporting 
and Certification of Disclosure in Exchange Act Periodic Reports of 
Companies That Are Not Accelerated Filers

AGENCY: Securities and Exchange Commission.

ACTION: Final rule; extension of compliance dates; request for comment.

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SUMMARY: We are extending the compliance dates that were published on 
March 8, 2005, in Release No. 33-8545 [70 FR 11528], for companies that 
are not accelerated filers, for certain amendments to Rules 13a-15 and 
15d-15 under the Securities Exchange Act of 1934, Items 308(a) and (b) 
of Regulations S-K and S-B, Item 15 of Form 20-F and General 
Instruction B of Form 40-F. These amendments require companies, other 
than registered investment companies, to include in their annual 
reports a report of management and accompanying auditor's report on the 
company's internal control over financial reporting. The amendments 
also require management to evaluate, as of the end of each fiscal 
period, any change in the company's internal control over financial 
reporting that occurred during the period that has materially affected, 
or is reasonably likely to materially affect, the company's internal 
control over financial reporting. We are also extending the compliance 
dates applicable to companies that are not accelerated filers for 
amendments to certain representations that must be included in the 
certifications required by Exchange Act Rules 13a-14 and 15d-14 
regarding a company's internal control over financial reporting. 
Finally, we are soliciting comment about the implementation of these 
rules.

DATES: Effective Date: The effective date published on June 18, 2003, 
in Release No. 33-8238 [68 FR 36636] remains August 14, 2003. The 
effective date of this document is September 29, 2005.
    Comment Date: Comments should be received on or before October 31, 
2005.
    Compliance Dates: The compliance dates are extended as follows: A 
company that is not an accelerated filer must begin to comply with 
these requirements for its first fiscal year ending on or after July 
15, 2007. Companies must begin to comply with the provisions of 
Exchange Act Rule 13a-(d) or 15d-(d), whichever applies, requiring an 
evaluation of changes to internal control over financial reporting 
requirements with respect to the company's first periodic report due 
after the first annual report that must include management's report on 
internal control over financial reporting.
    In addition, during the extended compliance period, a company that 
is not an accelerated filer may continue to omit the amended portion of 
the introductory language in paragraph 4 of the certification required 
by Exchange Act Rules 13a-14(a) and 15d-14(a) that refers to the 
certifying officers' responsibility for establishing and maintaining 
internal control over financial reporting for the company, as well as 
paragraph 4(b). This language, however, must be provided in the first 
annual report required to contain

[[Page 56826]]

management's internal control report and in all periodic reports filed 
thereafter. The extended compliance dates also apply to the amendments 
of Exchange Act Rules 13a-15(a) and 15d-15(a) relating to the 
maintenance of internal control over financial reporting. The 
compliance dates relating to accelerated filers and registered 
investment companies published in Release No. 33-8392 [69 FR 9722] are 
not affected by this release.
    While the definition of an accelerated filer in Exchange Act Rule 
12b-2 previously has had applicability only for a foreign private 
issuer that files its Exchange Act periodic reports on Forms 10-K and 
10-Q, the definition by its terms does not exclude foreign private 
issuers. As of December 1, 2005, a foreign private issuer that is an 
accelerated filer and files its annual report on Form 20-F will become 
subject to a requirement in new Item 4A of Form 20-F to disclose 
unresolved staff comments. This change was part of our recently adopted 
Securities Offering Reform final rules published in Release No. 33-8591 
[70 FR 44722]. A foreign private issuer that is an accelerated filer 
under the Exchange Act Rule 12b-2 definition, and that files its annual 
reports on Form 20-F or Form 40-F, must begin to comply with the 
internal control over financial reporting and related requirements in 
the annual report for its first fiscal year ending on or after July 15, 
2006. A foreign private issuer that is not an accelerated filer under 
the Exchange Act Rule 12b-2 definition must begin to comply in its 
annual report for its first fiscal year ending on or after July 15, 
2007.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/other.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number S7-06-03 on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov
). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-9303.
    All submissions should refer to File Number S7-06-03. This file 
number should be included on the subject line if e-mail is used. To 
help us process and review your comments more efficiently, please use 
only one method. The Commission will post all comments on the 
Commission's Internet Web site (http://www.sec.gov/rules/other.shtml). 

Comments are also available for public inspection and copying in the 
Commission's Public Reference Room, 100 F Street, NE., Washington, DC 
20549. All comments received will be posted without change; we do not 
edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: Sean Harrison, Special Counsel, Office 
of Rulemaking, Division of Corporation Finance, at (202) 551-3430, U.S. 
Securities and Exchange Commission, 100 F Street, NE., Washington, DC 
20549-3628.

SUPPLEMENTARY INFORMATION: On June 5, 2003,\1\ the Commission adopted 
several amendments to its rules and forms implementing Section 404 of 
the Sarbanes-Oxley Act of 2002.\2\ Among other things, these amendments 
require companies, other than registered investment companies, to 
include in their annual reports a report of management on the company's 
internal control over financial reporting and an accompanying auditor's 
report, and to evaluate, as of the end of each fiscal quarter, or year 
in the case of a foreign private issuer filing its annual report on 
Form 20-F or Form 40-F,\3\ any change in the company's internal control 
over financial reporting that occurred during the period that has 
materially affected, or is reasonably likely to materially affect, the 
company's internal control over financial reporting.
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    \1\ See Release No. 33-8238 (June 5, 2003) [68 FR 36636].
    \2\ 15 U.S.C. 7262.
    \3\ 17 CFR 249.20f and 249.40f.
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    On February 24, 2004, we approved an extension of the original 
compliance dates for the amendments related to internal control 
reporting.\4\ Specifically, we extended the compliance dates for 
companies that are accelerated filers, as defined in Rule 12b-2 \5\ 
under the Securities Exchange Act of 1934,\6\ to fiscal years ending on 
or after November 15, 2004, and for companies that are not accelerated 
filers and for foreign private issuers, to fiscal years ending on or 
after July 15, 2005. We believed that providing additional time for 
compliance was appropriate in light of both the substantial time and 
resources needed to properly implement the rules and to provide 
additional time for companies and their auditors to implement Auditing 
Standard No. 2, which set forth new standards for conducting an audit 
of internal control over financial reporting performed in conjunction 
with an audit of the financial statements.\7\
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    \4\ See Release No. 33-8392 (February 24, 2004) [69 FR 9722].
    \5\ 17 CFR 240.12b-2. An ``accelerated filer'' means an issuer 
after it first meets the following conditions as of the end of its 
fiscal year: (i) the aggregate market value of the voting and non-
voting common equity held by non-affiliates of the issuer is $75 
million or more; (ii) the issuer has been subject to the 
requirements of Section 13(a) or 15(d) of the Exchange Act for a 
period of at least twelve calendar months; (iii) the issuer has 
filed at least one annual report pursuant to Section 13(a) or 15(d) 
of the Exchange Act; and (iv) the issuer is not eligible to use 
Forms 10-KSB and 10-QSB for its annual and quarterly reports. In a 
separate release that we are issuing today, we are proposing to add 
a definition of ``large accelerated filer'' to Exchange Act Rule 
12b-2. If we adopt that proposal, the extension of compliance dates 
for internal control reports affected by this release would apply to 
companies, including foreign private issuers, that are neither 
accelerated filers nor large accelerated filers. See Release No. 33-
8617 (September 22, 2005).
    \6\ 15 U.S.C. 78a et. seq.
    \7\ See Release No. 34-49884 File No. PCAOB 2004-03 (June 17, 
2004) [69 FR 35083]. Auditing Standard No. 2 provides the 
professional standards and related performance guidance for 
independent auditors to attest to, and report on, the effectiveness 
of companies' internal control over financial reporting.
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    On March 2, 2005, we approved a further one-year extension of the 
compliance dates for companies that are not accelerated filers and for 
foreign private issuers filing annual reports on Form 20-F or 40-F.\8\ 
In granting this relief, we noted that an extension was warranted, in 
part, in view of the significant effort being expended by many foreign 
private issuers to begin complying with new International Financial 
Reporting Standards.\9\
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    \8\ See Release No. 33-8545 (March 2, 2005) [70 FR 11528].
    \9\ In March 2004, we proposed amendments to Form 20-F under the 
Exchange Act to provide foreign private issuers a one-time 
accommodation relating to financial statements prepared under the 
International Financial Reporting Standards. These amendments were 
adopted in April 2005. See Release No. 34-49403 (March 11, 2004) [69 
FR 12904] and Release No. 34-51535 (April 12, 2005) [70 FR 20674].
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    In addition, we thought it was appropriate to provide an additional 
extension for non-accelerated filers in recognition of other efforts in 
the market place that might affect the implementation of internal 
control reporting by smaller companies. For example, at the request of 
Commission staff, the Committee of Sponsoring Organizations of the 
Treadway Commission (``COSO'') established a task force to provide more 
guidance on how the COSO Internal Control-Integrated Framework (the

[[Page 56827]]

``framework'')\10\ can be applied to smaller public companies. 
Moreover, the Commission organized the Advisory Committee on Smaller 
Public Companies in March 2005 to examine the impact of the Sarbanes-
Oxley Act and other federal securities laws on smaller companies.\11\ 
These efforts were just commencing at the time we approved the 
extension.
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    \10\ Under Commission rules, a reporting company is required to 
use a suitable, recognized control framework that is established by 
a body or group that has followed due-process procedures, such as 
the COSO Framework, to assess the effectiveness of the company's 
internal control over financial reporting. See Exchange Act Rules 
13a-15(c) and 15d-15(c) [17 CFR 240.13a-15(c) and 240.15d-15(c)].
    \11\ See SEC Press Release 2004-174 (December 16, 2004) and 
Release No. 33-8514 (December 16, 2004) [69 FR 76498]. The Advisory 
Committee held its first meeting on April 12, 2005.
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    Today we are again extending the dates for complying with our 
internal control over financial reporting requirements for companies, 
including foreign private issuers, that are not accelerated filers. The 
extended compliance period does not in any way alter requirements 
regarding internal control that are in effect, including, without 
limitation, Section 13(b)(2) of the Exchange Act \12\ and the rules 
thereunder. In this regard, notwithstanding the deferral of the 
applicability of the specific requirements of our rules under Section 
404 of the Sarbanes-Oxley Act (and also, as a result, the deferral of 
the applicability of Auditing Standard No. 2 of the Public Company 
Accounting Oversight Board), non-accelerated filers must continue to 
assess whether the company's internal accounting controls are 
sufficient to meet applicable requirements under federal securities 
laws, and we would expect that officers with responsibility for 
financial reporting and internal control and audit committees (or in 
the absence of audit committees, boards of directors) would continue to 
work together in this area. Moreover, independent auditors of non-
accelerated filers must consider filers' internal accounting controls 
in connection with the conduct of audits of financial statements in 
accordance with the standards of the Public Company Accounting 
Oversight Board.\13\
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    \12\ 15 U.S.C. 78m(b)(2).
    \13\ See Auditing Standards Board, AICPA, Statement on Auditing 
Standards No. 78, Consideration of Internal Control in a Financial 
Statement Audit: An Amendment to Statement on Auditing Standards No. 
55 (1995), adopted by the PCAOB in Rule 3200T, Interim Auditing 
Standards, and as amended by the PCAOB on September 15, 2004 in 
Conforming Amendments to PCAOB Interim Standards Resulting From the 
Adoption of PCAOB Auditing Standard No. 2, ``An Audit of Internal 
Control Over Financial Reporting Performed in Conjunction With an 
Audit of Financial Statements.''
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    The Commission, for good cause, finds that notice and solicitation 
of comment regarding extension of the compliance dates is impractical, 
unnecessary and contrary to the public interest.\14\ First, comments 
regarding current requirements under Section 404, including comments 
provided at, and in connection with our Roundtable on Implementation of 
Internal Control Reporting Provisions held on April 13, 2005, raise 
issues as to whether a broadly accepted or demonstrably suitable 
framework is currently in place for evaluating internal control at 
smaller public companies, including non-accelerated filers. As stated 
above, the Commission staff has sought an enhanced framework for 
smaller public companies, including by calling on COSO to evaluate its 
existing framework and possible adjustments, modifications or 
supplemental guidance for smaller public companies.
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    \14\ See Section 553(b)(3)(B) of the Administrative Procedure 
Act [5 U.S.C. 553(b)(3)(B)] (stating that an agency may dispense 
with prior notice and comment when it finds, for good cause, that 
notice and comment are ``impracticable, unnecessary, or contrary to 
the public interest.'').
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    We believe that the COSO task force has devoted significant time 
and effort to this matter and appreciate their contribution in an 
important area. We also believe, however, that the task has proven 
challenging and more time-consuming than anticipated. The COSO task 
force has indicated to the Commission staff that it is approaching the 
point when an exposure draft will be made available for public comment. 
Any conclusions are a number of months away.
    Second, by that time, significant work will have been done, and 
significant expenses incurred, by many non-accelerated filers to comply 
with the existing requirement for their first fiscal year ending on or 
after July 15, 2006, unless the current compliance date is extended. We 
believe that only an immediate deferral of the current compliance date 
can forestall that result. Due to the significant costs that smaller 
companies are likely to incur to prepare for initial compliance with 
the internal control requirements, we think that it is critical to make 
the extension effective as soon as possible so that they have the 
certainty of knowing that they can rely on it. We believe that many 
smaller companies already have begun to prepare for compliance with the 
internal reporting control requirements.\15\
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    \15\ See, for example, the statement of William A. Loving, Jr., 
Executive Vice President and Chief Executive Officer of Pendleton 
County Bank that he submitted on behalf of the Independent Community 
Bankers of America. In his statement, Mr. Loving indicated that his 
bank already has spent approximately $40,000 in consultancy and 
outside vendor costs, $10,000 in training and education, and 160 
staff hours to comply with Sarbanes-Oxley Act requirements. It 
anticipated incurring an additional 1,600 staff hours to prepare for 
compliance with the internal control requirements. Mr. Loving 
estimated the costs of the testing alone to be $50,000, not 
including internal staffing costs and additional external audit 
costs. Mr. Loving's statement is available at: http://www.sec.gov/rules/other/265-23/icba060805.pdf
.

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    In addition, the Advisory Committee on Smaller Public Companies 
continues to study the internal control over financial reporting 
requirements for smaller public companies and is scheduled to complete 
its work by April 2006. In the interim, the Advisory Committee recently 
has recommended that the Commission further extend the compliance date 
for companies that are not accelerated filers.\16\
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    \16\ On August 10, 2005, the Advisory Committee adopted a 
resolution recommending that the Commission extend the compliance 
dates of the internal control reporting requirements for companies 
that are not accelerated filers. The Advisory Committee is of the 
opinion that there is overall consensus and widely-held support for 
its recommendation and suggested that we implement it as soon as 
possible. See The Advisory Committee's Letter to Securities and 
Exchange Commission Chairman Christopher Cox, dated August 18, 2005.
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    The Commission further notes that many accelerated filers who 
became subject to the internal control over financial reporting 
requirements for the first time this year had difficulty filing their 
Form 10-K annual reports on time.\17\ Moreover, several of the 
responses that we received from accelerated filers in connection with 
our internal control roundtable indicated that many of the costs that 
they incurred in the initial year of compliance would not be recurring 
costs; they expected the internal control reporting process to become 
more efficient and less costly in subsequent years. Companies that are 
not accelerated filers may be able to benefit from the experiences of 
accelerated filers in the second year of compliance with the internal 
control reporting requirements as best practices emerge and increased 
efficiencies are realized. Finally, the Commission notes that the 
overwhelming majority of market capitalization of U.S. public companies 
is subject to our requirements under Section 404 notwithstanding this 
deferral. On the basis of the foregoing, for good cause and because the 
extension will relieve a

[[Page 56828]]

restriction, the extension will be effective on September 29, 2005.
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    \17\ During the first 11 months of the Commission's current 
fiscal year which ends on September 30, 2005, we received 2,320 
notifications of late Form 10-K filings on Form 12b-25. This 
represented a 13% increase over the total number of similar 
notifications that we received during all of our 2004 fiscal year.
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    To assist us in our ongoing consideration of Section 404 of the 
Sarbanes-Oxley Act in the context of smaller public companies, we are 
including a list of questions below to solicit public comment on some 
substantive issues regarding the application of our internal control 
over financial reporting requirements to these companies. We also are 
soliciting public comment on the amount of time and expense that 
companies that are not accelerated filers have incurred to date to 
prepare for compliance with the internal control reporting 
requirements. These comments will assist us in any future proposals 
regarding our rules under Section 404. We would expect to provide 
formal notice and an additional opportunity for public comment on any 
such proposals.
    In this regard, we note that the Advisory Committee recently also 
has solicited public input on a range of issues related to the current 
securities regulatory system for smaller companies, including the 
impact on smaller public companies of the internal control reporting 
requirements mandated by Section 404 of the Sarbanes-Oxley Act of 2002. 
In formulating any possible proposed revisions to the internal control 
reporting requirements that would affect smaller reporting companies, 
we intend to consider relevant recommendations made to the Commission 
by the Advisory Committee.

Request for Comment

     Should there be a different set of internal control over 
financial reporting requirements that applies to smaller companies than 
applies to larger companies? Would it be appropriate to apply a 
different set of substantive requirements to non-accelerated filers, or 
for management of non-accelerated filers to make a different kind of 
assessment? Why or why not? If you think that there should be a 
different set of requirements for companies that are not accelerated 
filers, what should those requirements be? What would be the impact of 
any such differences in the requirements on investors?
     Would a public float threshold that is higher or lower 
than the $75 million threshold that we use to distinguish accelerated 
filers from non-accelerated filers be more appropriate for this 
purpose? If so, what should the threshold be and why? Would it be 
better to use a test other than public float for this purpose, such as 
annual revenues, number of segments or number of locations or 
operations? If so, why?
     Should the independent auditor attestation requirements be 
different for smaller public companies? If so, how should the 
requirements differ?
     Should the same standard for auditing internal control 
over financial reporting apply to auditors of all public companies, or 
should there be different standards based on the size of the public 
company whose internal control is being audited? If the latter, how 
should the standards differ?
     How can we best assure that the costs of the internal 
control over financial reporting requirements imposed on smaller public 
companies are commensurate with the benefits?
     We solicit comment describing the actions that non-
accelerated filers already have taken to prepare for compliance with 
the internal control over financial reporting requirements. Specific 
time and cost estimates would be particularly helpful. We also would be 
interested in receiving additional information about the compliance 
burdens incurred this year by smaller accelerated filers that included 
internal control reports in their Form 10-K annual reports.

    Dated: September 22, 2005.

    By the Commission.
Jonathan G. Katz,
Secretary.
[FR Doc. 05-19426 Filed 9-28-05; 8:45 am]

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