Source: https://www.federalregister.gov/documents/2008/02/07/E8-2211/internal-control-over-financial-reporting-in-exchange-act-periodic-reports-of-non-accelerated-filers
Timestamp: 2018-04-26 23:44:58
Document Index: 755652824

Matched Legal Cases: ['art 228', 'art 229', '§\u2009228', 'art 249', '§\u2009249', '§\u2009249', '§\u2009249', '§\u2009240', '§\u2009249', '§\u2009249', '§\u2009249']

A Proposed Rule by the Securities and Exchange Commission on 02/07/2008
Comments should be received on or before March 10, 2008.
73 FR 7449
7449-7455 (7 pages)
Release Nos. 33-8889
34-57258
E8-2211
II. Proposed Extension of Auditor Attestation Compliance Date for Non-Accelerated Filers
VII. Statutory Authority and Text of the Proposed Amendments
Part I—Finanacial Information
https://www.federalregister.gov/d/E8-2211 https://www.federalregister.gov/d/E8-2211
Start Preamble Start Printed Page 7450
Proposed amendments of temporary rules.
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, on official business days between the hours of 10 a.m. and 3 p.m. 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.
We are proposing to amend the following forms and temporary rules: Rule 2-02T of Regulation S-X,[1] Item 308T of Regulation S-K,[2] and S-B,[3] Item 4T of Form 10-Q,[4] Item 3A(T) of Form 10-QSB,[5] Item 9A(T) of Form 10-K,[6] Item 8A(T) of Form 10-KSB,[7] Item 15T of Form 20-F,[8] and Instruction 3T of General Instruction B.(6) of Form 40-F.[9]
On December 15, 2006,[10] we extended the dates by which non-accelerated filers [11] must begin to comply with the internal control over financial reporting (“ICFR”) requirements mandated by Section 404 of the Sarbanes-Oxley Act of 2002.[12] Specifically, we postponed for five months, from fiscal years ending on or after July 15, 2007 to fiscal years ending on or after December 15, 2007, the date by which non-accelerated filers must begin to comply with the management report requirement in Item 308(a) of Regulation S-K.[13] We also postponed to fiscal years ending on or after December 15, 2008 the date by which non-accelerated filers must begin to comply with the auditor attestation report requirement in Item 308(b) of Regulation S-K.[14] We indicated that we would consider further postponing the auditor attestation report compliance date after considering the anticipated revisions to the Public Company Accounting Oversight Board's (“PCAOB”) Auditing Standard No. 2 (“AS No. 2”).
Second, we expected a deferred implementation of the auditor attestation requirement to save non-accelerated filers the full potential costs associated with the auditor's initial attestation to, and report on, management's assessment of ICFR during the period that changes to AS No. 2 were being considered and implemented, and the PCAOB was formulating guidance specifically for auditors of smaller public companies. Public commenters previously have asserted that the ICFR compliance costs are likely to be disproportionately higher for smaller public companies than larger ones, and that the auditor's fee represents a large percentage of those costs.[15]
Furthermore, we have learned from commenters, including those participating in our roundtables on implementation of the ICFR requirements, that while companies incur increased internal costs in the first year of compliance, some of which are due to “deferred maintenance” items (for example, documentation, remediation, etc.), these costs may Start Printed Page 7451decrease in the second year.[16] Therefore, we anticipated that postponing the costs resulting from the auditor's attestation report until the second year would help non-accelerated filers to smooth the cost spike that many accelerated filers experienced in their first year of compliance with the Section 404 requirements.
The compliance date extensions that we granted in 2006 were part of a series of actions that the Commission and PCAOB each announced that they intended to take to improve implementation of the internal control over financial reporting requirements.[17] These actions included:
Issuance by the Commission of interpretive guidance for management to assist management in complying with the ICFR evaluation and disclosure requirements;
Consideration of efforts by COSO to provide more guidance on how the COSO framework on internal control can be applied to smaller public companies;
The PCAOB's issuance, with Commission approval, of Auditing Standard No. 5 (“AS No. 5”), which replaced AS No. 2;
On June 20, 2007, we approved the issuance of interpretive guidance[18] and adopted rule amendments[19] to help public companies strengthen their ICFR evaluations while reducing unnecessary costs. The interpretive release provided guidance for management on how to conduct an evaluation of the effectiveness of a company's ICFR. The guidance sets forth an approach by which management can conduct a top-down, risk-based evaluation of ICFR.
As discussed above, on July 25, 2007, we approved the PCAOB's AS No. 5, which replaced AS No. 2. The new standard sets forth the professional standards and related performance guidance for independent auditors to attest to, and report on, management's assessment of the effectiveness of ICFR. Our management guidance, in combination with AS No. 5, was intended to make ICFR audits and management evaluations of ICFR more cost-effective by being risk-based and scalable to a company's size and complexity. Although the PCAOB issued AS No. 5, and we approved it, according to our planned timetables, there still are some additional actions that the Commission and PCAOB intend to take that give us reason to propose a further extension of the auditor attestation report compliance date for non-accelerated filers.
One of these actions is the PCAOB's issuance of final staff guidance on auditing ICFR of smaller public companies. On October 17, 2007, the PCAOB published preliminary staff guidance that demonstrates how auditors can apply the principles described in AS No. 5 and provides examples of approaches to particular issues that might arise in the audits of smaller, less complex public companies.[20] Topics discussed in the PCAOB's guidance include: Entity-level controls, risk of management override, segregation of duties and alternative controls, information technology controls, financial reporting competencies, and testing controls with less formal documentation. The PCAOB sought public comment on this guidance, and the comment period ended on December 17, 2007.[21]
Another action involves a study that we are undertaking to determine whether the Section 404(b) auditor attestation requirement of the Sarbanes-Oxley Act is being implemented in a manner that will be cost-effective for smaller reporting companies. The study will pay special attention to those small companies that are complying with the ICFR requirements for the first time.
This study of costs and benefits will include a Web-based survey of companies that are subject to the ICFR requirements as well as in-depth interviews with a subset of these companies. Our plan is to gather data from a large cross-section of companies about the costs and benefits of compliance with the ICFR requirements and to evaluate whether the new management guidance and AS No. 5 are having the intended effect of facilitating more cost-effective ICFR evaluations and audits. Because we intend to collect data based on companies' experiences, this study will be taking place in the coming months as companies for the first time prepare their financial statements and undergo external audits under the new AS No. 5 and/or conduct their internal ICFR evaluations with the aid of the new management guidance. We anticipate that the study and analysis of the results will be completed no earlier than the summer of 2008.
We also note that others have expressed concerns about the orderly and efficient implementation of the ICFR requirements.[22]
If we do not adopt the proposed amendments, non-accelerated filers will have to begin complying with the auditor attestation requirement for fiscal years ending on or after December 15, 2008. To accomplish this, in 2008, many non-accelerated filers would need to engage their independent auditors to perform integrated audits of their financial statements and ICFR. Without an extension, these companies may begin to incur costs before we have an opportunity to observe whether further action to improve the effectiveness and efficiency of Section 404 implementation is warranted. Therefore, we believe that an additional one-year deferral of the auditor attestation requirement would be appropriate so that these companies do not incur unnecessary compliance costs before we have the benefit of the study. An additional one-year deferral will allow the PCAOB additional time during 2008 to promulgate its guidance for ICFR audits of smaller public companies, as well as additional time for the auditors Start Printed Page 7452of non-accelerated filers to incorporate such guidance in their planning and conduct of their ICFR audits during 2009.
We propose to amend Item 308T of Regulation S-K, Rule 2-02T of Regulation S-X, and Forms 10-Q, 10-K, 20-F and 40-F to require non-accelerated filers to provide their auditor's attestation in their annual reports filed for fiscal years ending on or after December 15, 2009. If we adopt the proposed amendments, a non-accelerated filer would continue to be required to state in its management report on ICFR that the company's annual report does not include an auditor attestation report.[23]
In the 2006 Release, we also adopted a temporary amendment that provided that the management report included in a non-accelerated filer's annual report that did not contain the auditor's attestation report would be deemed “furnished” rather than “filed” and not be subject to liability under Section 18 of the Exchange Act.[24] We acknowledged in that release non-accelerated filers filing only a management report during their first year of compliance with the Section 404(a) requirements may become subject to more second-guessing as a result of separating the management report from the auditor's attestation. As proposed, the amendments would maintain this distinction.
We request and encourage any interested person to submit comments regarding the proposed amendments to extend the auditor attestation report compliance date described above. In particular, we solicit comment on the following questions:
Is it appropriate to provide a further extension of the auditor attestation requirement for non-accelerated filers as proposed? If so, should we postpone this requirement for an additional year as proposed, or would a longer or shorter timeframe be more appropriate?
How would the proposed extension affect investors in non-accelerated filers?
Would the proposed additional deferral of the auditor's attestation report requirement make the application of the Section 404 requirements more or less efficient and effective for non-accelerated filers?
Should management's report on ICFR be “filed” rather than “furnished” during the second year of the non-accelerated filer's compliance with the ICFR requirements under Section 404(a) if we adopt the proposed extension?
In connection with our original proposal and adoption of the rules and amendments implementing the Section 404 requirements, we submitted cost and burden estimates of the collection of information requirements of the amendments to the Office of Management and Budget (“OMB”). We published a notice requesting comment on the collection of information requirements in the proposing release for the rule amendments. We submitted these requirements to the OMB for review in accordance with the Paperwork Reduction Act of 1995 (“PRA”) [25] and received approval of these estimates. We do not believe that the proposed extension will result in any change in the collection of information requirements of the amendments implementing Section 404. Therefore, we are not revising our PRA burden and cost estimates submitted to the OMB.
The proposed amendments would postpone for one year the date by which a non-accelerated filer would be required to include in its annual report an auditor attestation report on management's assessment of internal control over financial reporting. As a result, all non-accelerated filers would be required to complete only management's assessment in their first and second year of their compliance with the Section 404 requirements.
We plan to conduct a study to assess whether the Section 404(b) auditor attestation requirement of the Sarbanes-Oxley Act is being implemented in a manner that will be cost-effective for smaller reporting companies. Our management guidance and the new auditing standard were designed to make management evaluations and ICFR audits more cost-effective. We believe that an additional one-year deferral of the auditor attestation report requirement would benefit non-accelerated filers by helping smaller companies avoid incurring unnecessary compliance costs as we determine whether further action to improve the effectiveness and efficiency of Section 404 implementation is warranted. In addition, we believe that non-accelerated filers may experience the following additional benefits from the proposed extension:
Auditors of non-accelerated filers would have significantly more time to conform their ICFR audit approach to meet the requirements of AS No. 5, and to consider the PCAOB's guidance for auditors of smaller public companies; and
Non-accelerated filers would have additional time to focus on their approach for evaluating and reporting on the effectiveness of ICFR. This may facilitate their efforts to develop best practices and efficiencies in preparing the management report prior to becoming subject to the auditor attestation report requirement.
If we adopt the proposed amendments, investors in non-accelerated filers will have to wait longer than they would in the absence of the proposed extension for the assurances provided by the attestation report by the companies' auditor on management's report on ICFR and the added investor confidence that could result. The proposed amendments may increase the risk that, without the auditor's attestation, some non-accelerated filers may erroneously conclude that the company's ICFR is effective, when an ICFR audit might reveal that it is not. In addition, some companies may conduct an assessment that is not as thorough, careful and as appropriate to the company's circumstances as they would perform if the auditor were also conducting an audit of ICFR. The proposed amendments may also increase the risk that weaknesses in a company's ICFR will go undetected for a longer period of time.
We request data to quantify the potential costs and benefits described above. We seek estimates of these costs and benefits, as well as any costs and benefits that we have not identified that may result from the adoption of these proposed amendments. We also request Start Printed Page 7453qualitative feedback on the nature of the potential benefits and costs described above and any benefits and costs we may have overlooked.
For purposes of the Small Business Regulatory Enforcement Fairness Act of 1996, or “SBREFA,” [26] we solicit data to determine whether the proposals constitute a “major” rule. Under SBREFA, a rule is considered “major” where, if adopted, it results or is likely to result in:
Section 23(a)(2) of the Exchange Act [27] also requires us, when adopting rules under the Exchange Act, to consider the impact that any new rule would have on competition. Section 23(a)(2) prohibits us from adopting any rule that would impose a burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act. In addition, Section 2(b) [28] of the Securities Act and Section 3(f) [29] of the Exchange Act require us, when engaging in rulemaking where we are required to consider or determine whether an action is necessary or appropriate in the public interest, to also consider whether the action will promote efficiency, competition, and capital formation.
We believe that taking additional time to evaluate how efficiently the Section 404(b) process is being implemented reduces the possibilities of needless inefficiencies and transition costs for non-accelerated filers. Further, if the costs incurred by companies are unnecessarily high, companies may find it difficult to grow and may experience barriers to capital formation. We expect that this additional one-year delay of the auditor attestation report requirement will make the implementation process more efficient and less costly for non-accelerated filers, which should promote efficiency and capital formation.
It is possible that a competitive impact could result from the differing treatment of non-accelerated filers and larger companies that already have been complying with the Section 404 requirements, but we do not expect that the extension will have any measurable effect on competition. We solicit public comment that will assist us in assessing the impact that the proposed amendments could have on competition, efficiency and capital formation.
This Initial Regulatory Flexibility Analysis (“IRFA”) has been prepared in accordance with the Regulatory Flexibility Act.[30] This IRFA involves proposed amendments to temporary rules Item 308T of Regulation S-K and S-B, Rule 2-02T of Regulation S-X, Item 4T of Form 10-Q, Item 3A(T) of Form 10-QSB, Item 9A(T) of Form 10-K, Item 8A(T) of Form 10-KSB, Item 15T of Form 20-F, and Instruction 3T of General Instruction B.(6) of Form 40-F. A non-accelerated filer is currently required to start providing its auditor's attestation report on ICFR in its annual report for fiscal years ending on or after December 15, 2008. We propose to amend these forms and temporary rules to require a non-accelerated filer to start providing its auditor's attestation report on ICFR in annual reports for fiscal years ending on or after December 15, 2009.
The Commission plans to complete a study of the costs and benefits of companies' Section 404 implementation. We are proposing to defer the implementation of the auditor attestation report requirement for non-accelerated filers for an additional year for the following reasons, among others discussed above:
To enable non-accelerated filers more time to prepare and gain efficiencies in the review and evaluation of the effectiveness of internal control over financial reporting;
To provide the PCAOB additional time to promulgate its guidance for ICFR audits of smaller public companies; and
We are issuing the proposals under the authority set forth in Section 19 of the Securities Act, Sections 3, 12, 13, 15, 23 and 36 of the Exchange Act, and Sections 3(a) and 404 of the Sarbanes-Oxley Act.
The proposed changes would affect some issuers that are small entities. Exchange Act Rule 0-10(a) [31] defines an issuer, other than an investment company, to be a “small business” or “small organization” if it had total assets of $5 million or less on the last day of its most recent fiscal year. We estimate that there are approximately 1,100 issuers, other than registered investment companies, that may be considered small entities. The proposed amendments would apply to any small entity that is subject to reporting under either Section 13(a) or 15(d) of the Exchange Act.
The proposed amendments would alleviate reporting and compliance burdens by postponing by an additional year the date by which non-accelerated filers must begin to comply with the auditor attestation report on ICFR in their annual reports.
The ICFR requirements do not duplicate, overlap, or conflict with other federal rules.
The Regulatory Flexibility Act directs us to consider alternatives that would accomplish our stated objectives, while minimizing any significant adverse impact on small entities. In connection with the proposed amendments, we considered the following alternatives: Start Printed Page 7454
The proposed amendments would establish a different compliance and reporting timetable for small entities. We believe that the proposed amendments would promote the primary goal of enhancing the quality of reporting and increasing investor confidence in the fairness and integrity of the securities markets. Therefore we do not believe exempting small entities from the proposed amendments would be appropriate.
The number of small entity issuers that may be affected by the proposed amendments;
The existence or nature of the potential impact of the proposed amendments on small entity issuers discussed in the analysis; and
Commenters are asked to describe the nature of any impact and provide empirical data supporting the extent of the impact. Such comments will be considered in the preparation of the Final Regulatory Flexibility Analysis, if we adopt the proposed amendments, and will be placed in the same public file as comments on the proposed amendments themselves.
The amendments described in this release are being proposed under the authority set forth in Section 19 of the Securities Act, Sections 3, 12, 13, 15, 23 and 36 of the Exchange Act, and Sections 3(a) and 404 of the Sarbanes-Oxley Act.
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-3, 77aa(25), 77aa(26), 78c, 78j-1, 78 l, 78m, 78n, 78o(d), 78q, 78u-5, 78w(a), 78 ll, 78mm, 80a-8, 80a-20, 80a-29, 80a-30, 80a-31, 80a-37(a), 80b-3, 80b-11, 7202, 7218 and 7262, unless otherwise noted.
a. Removing paragraphs (a) and (b), and redesignating paragraphs (c) and (d) as paragraphs (a) and (b);
2. The authority citation for part 228 continues to read, in part, as follows:
3. Section 228.308T is amended by revising the date “December 15, 2008” in the “Note to Item 308T” to read “March 15, 2009”.
4. The authority citation for part 229 continues to read, in part, as follows:
§ 228.309T
5. Section 229.308T is amended by:
a. Revising the date “December 15, 2008” in the “Note to Item 308T” to read “December 15, 2009”; and
b. Revising the date “June 30, 2009” in paragraph (c) to read “June 30, 2010”.
6. The general authority citation for part 249 is revised to read as follows:
7. Form 20-F (referenced in § 249.220f), Part II, Item 15T is amended by:
a. Revising the date “December 15, 2008” in paragraph (2) to the “Note to Item 15T” to read “December 15, 2009”; and
8. Form 40-F (referenced in § 249.240f) is amended by:
a. Revising the date “December 15, 2008” in “Instruction 3T(2)” to the “Instructions to paragraphs (b), (c), (d) and (e) of General Instruction B.(6)” to read “December 15, 2009”; and
9. Form 10-Q (referenced in § 249.308a) is amended by revising Item 4T to Part I to read as follows:
Start Printed Page 7455
(a) If the registrant is neither a large accelerated filer nor an accelerated filer as those terms are defined in § 240.12b-2 of this chapter, furnish the information required by Items 307 and 308T(b) of Regulation S-K (17 CFR 229.307 and 229.308T(b)) with respect to a quarterly report that the registrant is required to file for a fiscal year ending on or after December 15, 2007 but before December 15, 2009.
10. Form 10-QSB (referenced in § 249.308b) is amended by revising Item 3A(T) to Part I to read as follows:
(a) Furnish the information required by Items 307 and 308T(b) of Regulation S-B (17 CFR 228.307 and 228.308T(b)) with respect to a quarterly report that the small business issuer is required to file for a fiscal year ending on or after December 15, 2007 but before October 31, 2008.
11. Form 10-K (referenced in § 249.310) is amended by:
a. Revising the date “December 15, 2008” in paragraph (a) to Item 9A(T) to Part II to read “December 15, 2009”; and
12. Form 10-KSB (referenced in § 249.310b) is amended by revising the date “December 15, 2008” in paragraph (a) to Item 8A(T) to Part II to read “March15, 2009”.
7. 17 CFR 249.310(b).
9. 17 CFR.249.240f.
10. See Release No. 33-8760 (December 15, 2006) [71 FR 76580] (the “2006 Release”).
13. 17 CFR 229.308(a). We effected the postponement, in part, by adding temporary Item 308T to Regulation S-K. We similarly added temporary Item 308T to Regulation S-B, but the Commission recently adopted amendments that will eliminate Regulation S-B effective March 15, 2009. See Release No. 33-8876 (December 19, 2007) [73 FR 934].
14. 17 CFR 229.308(b).
15. See, for example, letters of American Electronics Association, International Association of Small Broker-Dealers and Advisers, Small Business Entrepreneurship Council, and the Silicon Valley Leadership Group, Committee on Capital Markets Regulation on Release No. 33-8762 (December 20, 2006) [71 FR 77635], File No. S7-24-06.
16. Materials related to the Commission's 2005 Roundtable Discussion on Implementation of Internal Control Reporting Provisions and 2006 Roundtable on Second-Year Experiences with Internal Control Reporting and Auditing Provisions, including the archived roundtable broadcasts, are available at http://www.sec.gov/​spotlight/​soxcomp.htm.
17. See SEC Press Release 2006-75 (May 17, 2006), “SEC Announces Next Steps for Sarbanes-Oxley Implementation” and PCAOB Press Release (May 17, 2006), “Board Announces Four-Point Plan to Improve Implementation of Internal Control Reporting Requirements.”
18. Release No. 33-8810 (Jun. 20, 2007) [72 FR 35324].
19. Release No. 33-8809 (Jun. 20, 2007) [72 FR 35310]. The rule amendments, among other things, provided that an evaluation that complies with our interpretive guidance is one way to satisfy the annual ICFR evaluation requirement in Exchange Act Rules 13a-15(c) and 15d-15(c) [17 CFR 240.13a-15(c) and 240.15d-15(c)].
20. See “An Audit of Internal Control that is Integrated with an Audit of the Financial Statements: Guidance for Auditors of Smaller Companies,” (October 17, 2007), available at www.pcaobus.org.
21. The PCAOB has not announced when it plans to finalize this guidance.
22. See, for example, the May 8, 2007, letter to Chairman Christopher Cox and Chairman Mark Olson from Senator John Kerry, Chairman, Senate Committee on Small Business and Entrepreneurship, and Senator Olympia Snowe, Ranking Member, Senate Committee on Small Business and Entrepreneurship, available at http://sbc.senate.gov/​lettersout/​070508-SEC-PCAOB-HearingFollowUp.pdf; hearing on “Sarbanes-Oxley Section 404: New Evidence on the Costs for Small Businesses,” House Committee on Small Business (December 12, 2007); and the July 12, 2007, letter from Sharon Haeger, America's Community Bankers, on Release No. 34-55876 [72 FR 32340], File No. PCAOB 2007-02, available at http://www.sec.gov/​comments/​pcaob-2007-02/​pcaob200702.shtml.
23. See Item 308T(a)(4) of Regulation S-K, Item 15T(b)(4) of Form 20-F and General Instruction B.(6)(3T) of Form 40-F.
24. Section 18 of the Exchange Act [15 U.S.C. 78r] imposes liability on any person who makes or causes to be made in any application or report or document filed under the Act, or any rule thereunder, any statement that “was at the time and in the light of the circumstances under which it was made false or misleading with respect to any material fact.” As a result of the temporary Item 308T of Regulation S-K and S-B and the temporary amendments to Forms 20-F and 40-F, however, during the applicable periods, management's report would be subject to liability under this section only in the event that a non-accelerated filer specifically states that the report is to be considered “filed” under the Exchange Act or incorporates it by reference into a filing under the Securities Act or the Exchange Act.
25. 44 U.S.C. 3501 et seq. and 5 CFR 1320.11.
30. 5 U.S.C. 601.
31. 17 CFR 240.0-10(a).
[FR Doc. E8-2211 Filed 2-6-08; 8:45 am]