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SEC Moves to Further Ease Section 404 Compliance Burden
The SEC extended the compliance date for certain foreign
private issuers, and took several other steps to help smaller public companies,
foreign private issuers and newly public companies comply with Sarbanes-Oxley
Act Section 404 reporting requirements. Chairman Christopher Cox said that the
proposed relief would give the SEC and the Public Company Accounting Oversight
Board additional time to redesign Section 404 implementation in a way that is
more efficient and cost effective.
Effective August 15, 2006, foreign private issuers that are
accelerated filers, but not large accelerated filers, and that file their annual
reports on Form 20-F or Form 40-F, will have their compliance deadline extended
by one year. As a result, they will not have to begin providing an auditor's
attestation report on internal control over financial reporting in their annual
reports until fiscal years ending on or after July 15, 2007.
The SEC said that these foreign issuers will be required to
comply only with the Section 404 requirement to include management's report in
the Form 20-F or Form 40-F annual report filed for their first fiscal year
ending on or after July 15, 2006. They will not need to comply with the
requirement to provide the accounting firm's attestation report until they file
a Form 20-F or Form 40-F annual report for a fiscal year ending on or after July
15, 2007.
The move does not change the date by which a foreign
private issuer that is a large accelerated filer must comply with Section 404(a)
and (b) requirements, the SEC noted. Those filers are still required to include
both a report by management and an attestation report by the issuer's accounting
firm on internal control over financial reporting in their Form 20-F or Form
40-F filed for a fiscal year ending on or after July 15, 2006.
With respect to smaller public companies, the Commission
proposed to extend the date by which smaller companies that are non-accelerated
filers must provide a report on management's assessment of internal controls.
The initial compliance date would be moved from fiscal years ending on or after
July 15, 2007, to fiscal years ending on or after December 15, 2007.
The SEC also proposed to move the date by which
non-accelerated filers must begin to comply with the requirement to provide an
auditor's attestation report on internal control over financial reporting in
their annual reports to the first annual report for a fiscal year ending on or
after December 15, 2008. This extension would result in all non-accelerated
filers being required to complete only the management's portion of the internal
control requirements in their first year of compliance with the requirements.
The proposed extensions will give issuers and their
auditors an additional year to consider, and adapt to intended changes in
Auditing Standard No. 2, according to the Commission. The comment period on the
proposals relating to smaller public companies will be open for 30 days from
publication in the Federal Register.
The SEC also issued proposed Section 404 relief for new
public companies. The Commission proposed a transition period so that a company
would not be required to provide either a management assessment or an auditor
attestation report until it has previously filed one annual report. The relief
would apply to any company that has become public through an initial public
offering or a registered exchange offer, or that otherwise becomes subject to
the Exchange Act reporting requirements. It would include a foreign private
issuer that is listing on a U.S. exchange for the first time.
The SEC said that this proposal recognizes that preparation
of a newly public company's first annual report can be a time and resource
intensive process that may quickly follow an initial public offering or listing.
By not requiring the Section 404 reports until a newly public company files its
second annual report, the Commission said that it hopes to increase the
efficiency and effectiveness with which those companies eventually meet their
Section 404 compliance obligations.
Release Nos. 33-8730 and 33-8731 are reported at ¶87,618 and
¶87,619.
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