In 2004, Sarbanes-Oxley legislation required public companies to maintain effective internal control over financial reporting (“ICFR”) under Section 404. The largest public companies known as accelerated filers have implemented the internal control requirements of the Sarbanes-Oxley legislation. In 2007, management of non-accelerated filers (“NAFs”) began making assessments of their company’s ICFR under Section 404(a). In October 2009, the SEC again delayed the internal control audit requirement for NAFs.
Then, on July 21, 2010, President Obama signed into law the “Wall Street Reform Act,” which (among other things) permanently exempts NAFs from the Sarbanes-Oxley Section 404(b) internal control audit requirement. As a result, the current 404 requirement is as follows: accelerated filers must continue to comply with both 404(a) [management’s assessment of internal control] and 404(b); NAFs need only comply with 404(a).
The impact of the Wall Street Reform Act and the new regulatory landscape, changes in accounting rules (e.g., certain fair value measurements), risk oversight and the control environment, and increased SEC enforcement efforts will put audit committees and financial reporting to the test in the years ahead. With these factors in mind, when considering ICFR, we suggest that executive management ask themselves the following questions:
- Do you need to re-evaluate the company’s 404 process – the size, internal effort and the cost of compliance ?
- Does your 404 process need a fresh look ?
- Can the company comply with 404 more cost effectively ?
- Would your external auditors prefer that an accounting firm (vs. a consulting firm) assist management with the assessment of the company’s ICFR ?
- Will voluntary compliance with 404(b) help prevent fraud and/or avoid restatements of the company’s financial statements ?
- If your company is currently a NAF, will your growth plans require you to comply with 404(b) in the future ? If so, should you begin planning for this now vs. later ?
Squar Milner’s audit background comes from extensive experience documenting and testing internal controls because we serve as auditors for approximately 30 public reporting companies. This experience has now been enhanced as our partners have been involved with accelerated filers in Section 404 assignments and understand what needs to be done to achieve compliance. Squar Milner knows how to achieve compliance with Sarbanes-Oxley Section 404.
For more information, please contact:
Los Angeles/ Newport Beach/ San Diego
Ernest Miranda
Greg Reda
