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Glassman Says Section 404 Should Be Applied to All Public Companies 

In remarks at the Corporate Counsel Institute, SEC Commissioner Cynthia Glassman revealed her current view on the idea of exempting smaller public companies from complying with Sarbanes-Oxley Act Section 404. At a minimum, she said that small public companies should be held to a standard of establishing and maintaining effective internal controls over financial reporting. The harder question is the appropriate role of auditors in the process, in her view. Ms. Glassman believes that Section 404 should be applied appropriately for all companies and tailored if necessary based on a company's size and complexity, rather than exempting certain companies completely.

She reviewed current priorities and concerns at the SEC. She reported improvements in the disclosures contained in the management's discussion and analysis section of public company financial statements in the three years since the SEC issued guidance on the issue. Companies are explaining their financial statements better and filling in some of the gaps in generally accepted accounting principles, she said. More companies are explaining their results of operations rather than repeating the Generally Accepted Accounting Principles disclosure.

Ms. Glassman also reviewed executive compensation and the SEC's proposal to improve the information that is disclosed with a new compensation discussion and analysis requirement. Boilerplate language would be considered noncompliant and contrary to the spirit of the rule, she explained. Companies would have to explain why they are paying various types and amounts of compensation to executive officers and directors.

Ms. Glassman also touched on the SEC's voluntary XBRL pilot program, during which registrants can explore the costs and benefits of this new approach and the SEC's proposed proxy rule changes. She urged management teams and their counsel to ensure that companies comply with both the letter and the spirit of the SEC's rules, regulations and disclosure requirements. Ms. Glassman also encouraged interested parties to let her know the order in which they would prioritize rules that merit a fresh look. She acknowledged that more than a few could use an update.