Internal Control Over Financial Reporting in Exchange Act Periodic Reports of Non-Accelerated Filers, 38094-38100 [E8-14942]
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Federal Register / Vol. 73, No. 128 / Wednesday, July 2, 2008 / Rules and Regulations
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
SECURITIES AND EXCHANGE
COMMISSION
17 CFR Parts 210, 228, 229 and 249
I. Background
[Release Nos. 33–8934; 34–58028; File No.
S7–06–03]
RIN 3235–AJ64
Internal Control Over Financial
Reporting in Exchange Act Periodic
Reports of Non-Accelerated Filers
Securities and Exchange
Commission.
ACTION: Final rules.
AGENCY:
SUMMARY: We are adopting amendments
to temporary rules that were published
on December 21, 2006, in Release No.
33–8760 [71 FR 76580]. Those
temporary rules require companies that
are non-accelerated filers to include in
their annual reports, pursuant to rules
implementing section 404(b) of the
Sarbanes-Oxley Act of 2002, an
attestation report of their independent
auditors on internal control over
financial reporting for fiscal years
ending on or after December 15, 2008.
Under the amendments, a nonaccelerated filer will be required to file
the auditor’s attestation report on
internal control over financial reporting
when it files an annual report for a fiscal
year ending on or after December 15,
2009.
Effective Dates: The amendments
are effective September 2, 2008, except
Form 10–QSB will be effective from
September 2, 2008 to October 31, 2008;
§ 228.308T and Form 10–KSB will be
effective from September 2, 2008 to
March 15, 2009; and §§ 210.2–02T and
229.308T, Form 20–F, Form 40–F, Form
10–Q, and Form 10–K will be effective
from September 2, 2008 to June 30,
2010.
DATES:
FOR FURTHER INFORMATION CONTACT:
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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: We are
adopting amendments to the following
forms and temporary rules: Rule 2–02T
of Regulation S–X,1 Item 308T of
Regulations S–K2 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
1 17
CFR 210–2.02T.
CFR 229.308T.
3 17 CFR 228.310T.
4 17 CFR 249.308a.
5 17 CFR 249.308b.
6 17 CFR 249.310.
2 17
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In February 2008,10 we proposed an
extension of the section 404(b) auditor
attestation requirement for nonaccelerated filers.11 This proposal
followed an action we took in December
200612 to extend the dates by which
non-accelerated filers must begin to
comply with the internal control over
financial reporting (‘‘ICFR’’)
requirements mandated by Section 404
of the Sarbanes-Oxley Act of 2002.13
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.14 We also postponed to
fiscal years ending on or after December
15, 2008, the date by which nonaccelerated filers must begin to comply
with the auditor attestation report
requirement in Item 308(b) of
Regulation S–K.15 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’’).
In the 2006 Release, we cited two
primary reasons for deferring
implementation of the auditor
attestation report requirement for an
additional year after implementation of
the management report requirement.
First, we stated that the deferred
implementation would afford nonaccelerated filers and their auditors the
benefit of anticipated changes by the
PCAOB to AS No. 2, subject to
CFR 249.310b.
CFR 249.220f.
9 17 CFR 249.240f.
10 See Release No. 33–8889 (February 1, 2008) [73
FR 7450].
11 Although the term ‘‘non-accelerated filer’’ is
not defined in our rules, we use it throughout this
release to refer to an Exchange Act reporting
company that does not meet the Rule 12b–2
definition of either an ‘‘accelerated filer’’ or a ‘‘large
accelerated filer.’’
12 See Release No. 33–8760 (December 15, 2006)
[71 FR 76580] (the ‘‘2006 Release’’).
13 15 U.S.C. 7262.
14 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].
15 17 CFR 229.308(b).
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7 17
8 17
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Commission approval, as well as any
implementation guidance that the
PCAOB issued for auditors of smaller
public companies.
Second, we expected a deferred
implementation of the auditor
attestation requirement to save nonaccelerated 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.16
On June 20, 2007, we approved the
issuance of interpretive guidance
regarding management’s report on
ICFR17 and adopted rule amendments18
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.
In addition, on July 25, 2007, we
approved the PCAOB’s Auditing
Standard No. 5 (‘‘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, is intended to make
evaluations of ICFR and ICFR audits
more effective and efficient by being
risk-based and scalable to a company’s
size and complexity.
On February 1, 2008, we proposed a
one-year extension of the Section 404(b)
16 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.
17 Release No. 33–8810 (Jun. 20, 2007) [72 FR
35324].
18 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)].
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auditor attestation requirement for nonaccelerated filers in view of the fact that
there were still some additional actions
that the Commission and PCAOB
intended to take with respect to
implementation of the section 404
requirements, and of concerns
expressed by some about the orderly
and efficient implementation of the
ICFR requirements.19
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
comment period on the PCAOB’s
guidance ended on December 17, 2007,
and the PCAOB is working on the final
guidance.
Another action involves a study that
we are undertaking to help determine
whether our new management guidance
on evaluating ICFR and AS No. 5 are
having the intended effect of facilitating
more cost-effective ICFR evaluations
and audits for smaller reporting
companies. Our study plan includes
gathering new data from a broad array
of companies about the costs and
benefits of compliance with the ICFR
requirements. The study will pay
special attention to those smaller
companies that are complying with the
ICFR requirements for the first time.
One part of the study will consist of
a web-based survey of all companies to
19 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-PCAOBHearingFollowUp.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.
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 http://
www.pcaobus.org.
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which the section 404 requirements
apply. Participation in this survey will
be voluntary. Another part of the study
will involve the Commission staff
conducting in-depth interviews of a
small number of interested parties. We
are targeting the fall of 2008 for the
initial release of findings.
We have received letters from a total
of 67 commenters on the proposal to
further extend the section 404(b) auditor
attestation requirement for nonaccelerated filers.21 Approximately half
of the commenters supported the
proposed one-year extension,22 and half
opposed a further delay in compliance
with the section 404(b) requirements by
non-accelerated filers.23 Many of the
commenters that supported the
proposed extension agreed that the oneyear deferral was appropriate in light of
our upcoming study. Absent the
extension that we are granting in this
release, many non-accelerated filers
would have begun to incur independent
auditor costs for fiscal years ending on
or after December 15, 2008, before we
had the opportunity to observe whether
further action to improve the
effectiveness and efficiency of section
404 implementation is warranted. In
addition, several commenters that
supported the proposed extension also
believed the extension was necessary to
provide additional time for companies
and their auditors to consider the
PCAOB’s guidance on the ICFR audits of
smaller public companies.24 Another
commenter,25 while neither supporting
nor opposing the proposed extension,
suggested that the Commission should
limit the extension to companies that
qualify as a ‘‘smaller reporting
21 The public comments we received are available
for inspection in the Commission’s Public
Reference Room at 100 F Street, NE., Washington
DC 20549 in File No. S7–06–03. They are also
available on-line at http://www.sec.gov/rules/
proposed/s70603.shtml. Of the 67 commenters, 49
were graduate and undergraduate students at the
University of Wisconsin-La Crosse. More than half
of the students opposed the proposed extension.
22 See, for example, letters from the U.S. Chamber
of Commerce, First National Bank of Groton (NY),
Mark Hart, Independent Community Bankers of
America (‘‘ICBA’’), International Association of
Small Broker Dealers and Advisors (‘‘IASBD’’), Kyle
Kaja, George Merkl, New York State Society of
Certified Public Accountants (‘‘NYSSCPA’’),
Melissa Palmer, Maria Romundstad, the Office of
Advocacy of the Small Business Administration
(‘‘SBA’’), Small Business and Entrepreneurship
Council (‘‘SBEC’’), David Tews and Jordan Walt.
23 See, for example, letters from Kevin Burgess,
California Public Employees’ Retirement System
(‘‘CalPERS’’), Council of Institutional Investors
(‘‘CII’’), Daniel DeGier, Christopher Fearn, Jared
Galassini and Anna Wildenberg.
24 See, for example, letters from the U.S. Chamber
of Commerce, ICBA and Nicole Nederloe.
25 See letter from Ernst & Young LLP(‘‘E&Y’’).
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38095
company’’ under Exchange Act Rule
12b–2.26
Many of the commenters opposed to
the proposed extension thought that
non-accelerated filers have had
adequate time to prepare for full
compliance with the Section 404
requirements.27 Several commenters
opposed to the proposed extension also
claimed that it was unnecessary for the
Commission to undertake a study
because several studies on the topic
already have been completed, including
some studies that reported evidence
from surveys.28
We believe that an additional oneyear deferral of the auditor attestation
requirement is appropriate so that nonaccelerated filers do not incur
unnecessary compliance costs. An
additional one-year deferral will allow
these companies additional time to
consider the PCAOB’s guidance on ICFR
audits of smaller public companies
when it is finalized, as well as
additional time for the auditors of nonaccelerated filers to incorporate such
guidance in their planning and conduct
of their ICFR audits for 2009. The
planned study is designed to elicit
information on the recent compliance
experiences of companies that is not
available in the various earlier studies,
including those that use evidence from
surveys.29
II. Extension of Auditor Attestation
Compliance Date for Non-Accelerated
Filers
After consideration of the public
comments that were received, we are
adopting the one-year extension of the
auditor attestation report requirement
26 See 17 CFR 240.12b–2. Although there is
considerable overlap between companies that meet
the definition of a ‘‘smaller reporting company’’ in
Exchange Act Rule 12b–2 and companies that are
non-accelerated filers because they fall outside the
definitions of ‘‘accelerated filer’’ and ‘‘large
accelerated filer,’’ the terms ‘‘smaller reporting
company’’ and ‘‘non-accelerated filer’’ are not
synonymous. For example, a company that has
publicly issued a class of debt securities, but does
not have a class of equity securities outstanding
would be a non-accelerated filer even though it may
not meet the definition of a ‘‘smaller reporting
company.’’ Many companies that are debt-only
issuers, however, are subsidiaries of larger public
companies that meet the definition of accelerated
filer or large accelerated filer. Therefore, we do not
believe it necessary for purposes of this extension
to make a distinction between non-accelerated filers
and smaller reporting companies.
27 See, for example, the letters from CII, Jared
Galassini, Joshua Pike, and Jennifer Welsh.
28 See, for example, the letters from CII and
Michael Tolvstad.
29 A key objective of the planned survey is to
enable the Commission staff to evaluate any
response bias that might cause the responses to
over-represent the experiences of a particular subsample of companies, as opposed to the companies
that are affected by the Section 404 requirements
more generally.
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Federal Register / Vol. 73, No. 128 / Wednesday, July 2, 2008 / Rules and Regulations
substantially as proposed. We are
amending Item 308T of Regulations S–
K and S–B, 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.
A non-accelerated filer will 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.30
In the Proposing Release, we also
requested comment on whether
management’s report on ICFR should be
‘‘filed’’ rather than ‘‘furnished’’ and not
be subject to liability under Section 18
of the Exchange Act 31 during the
second year of a non-accelerated filer’s
compliance with the ICFR requirements
under section 404(a) if we adopted the
proposed extension. Two commenters
argued that we should discontinue
treating the management report on ICFR
as ‘‘furnished’’ rather than ‘‘filed’’
because the protection was not needed
for the second year of the section 404(b)
extension 32 Three commenters believed
that we should continue to allow the
management report on ICFR of nonaccelerated filers to be ‘‘furnished’’
rather than ‘‘filed’’ because nonaccelerated filers should not be subject
to liability under Section 18 until such
time that they have had their ICFR
attested to by their auditor.33
We recognize that a non-accelerated
filer that files only a management report
on ICFR may become subject to more
second-guessing as a result of separating
the management and auditor reports.
Management may conclude that the
company’s ICFR is effective when the
management report is filed without the
auditor’s attestation report, but the
company’s auditor may come to a
contrary conclusion in its report filed in
a subsequent year, and as a result, the
company’s previous assessment may be
called into question. To reduce the
liability risk associated with such
second-guessing, we believe that until
such time as non-accelerated filers are
required to comply with both the
section 404(a) and 404(b) requirements,
it is reasonable to continue the
temporary liability distinction and treat
the management report as ‘‘furnished’’
rather than ‘‘filed.’’ Therefore, we also
have decided to extend the amendments
that cause a non-accelerated filer’s
management report on ICFR to be
‘‘furnished’’ rather than ‘‘filed.’’ Of
course, material misstatements or
omissions in management’s report on
ICFR, regardless of whether the report is
‘‘furnished’’ or ‘‘filed,’’ are subject to
liability under section 10(b) and Rule
10b-5 under the Exchange Act.34
The revised compliance dates for the
Section 404 internal control
requirements are presented in the table
below:
Compliance dates for the internal control over financial reporting requirements
Filer status
Management report on ICFR
U.S. Issuer:
Non-accelerated filer (public float under
$75 million).
Large accelerated filer and accelerated filer
(public float above $75 million).
Foreign private issuer:
Non-accelerated filer (public float under
$75 million).
Accelerated filer (public float above $75
million and below $700 million).
Large accelerated filer (public float above
$700 million).
U.S. or foreign private issuer:
Newly public company ................................
III. Paperwork Reduction Act
In connection with our original
proposal and adoption of the rules and
amendments implementing the section
404 requirements,35 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
30 See
Items 308T(a)(4) of Regulations S–K and S–
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B.
31 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
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Auditor attestation on management’s report
on ICFR
Annual reports for fiscal years ending on or
after December 15, 2007.
Annual reports for fiscal years ending on or
after November 15, 2004.
Annual reports for fiscal years ending on or
after December 15, 2009.
Annual reports for fiscal years ending on or
after November 15, 2004.
Annual reports for fiscal years ending on or
after December 15, 2007.
Annual reports for fiscal years ending on or
after July 15, 2006.
Annual reports for fiscal years ending on or
after July 15, 2006.
Annual reports for fiscal years ending on or
after December 15, 2009.
Annual reports for fiscal years ending on or
after July 15, 2007.
Annual reports for fiscal years ending on or
after July 15, 2006.
Second annual report ......................................
Second annual report.
review in accordance with the
Paperwork Reduction Act of 1995
(‘‘PRA’’) 36 and received approval of
these estimates. We do not believe that
the amendments will result in any
change in the collection of information
requirements of the amendments
implementing section 404 and we
received no comments suggesting the
amendments would result in any
change. Therefore, we are not revising
our PRA burden and cost estimates
submitted to the OMB.
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.
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IV. Cost-Benefit Analysis
A. Benefits
The amendments will postpone for
one year the date by which a nonaccelerated filer must begin to include
in its annual report an auditor
attestation report on management’s
assessment of internal control over
financial reporting. As a result, nonaccelerated filers will be required to
complete only management’s
assessment in the first and second year
32 See
letters from CalPERS and E&Y.
letters from the U.S. Chamber of
Commerce, CommBancorp, Inc. and George Merkl.
34 See 15 U.S.C. 78j(b) and 17 CFR 240.10b–5.
35 See Release No. 33–8138 (October 22, 2002) [67
FR 66208] and Release No. 33–8238 (June 5, 2003)
[68 FR 36636].
36 44 U.S.C. 3501 et seq. and 5 CFR 1320.11.
33 See
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of their compliance with the section 404
requirements.
We are undertaking a study to help
assess whether the new management
guidance and AS No. 5 are having the
intended effect of facilitating more
effective and efficient ICFR evaluations
and audits for smaller reporting
companies. Our interpretive guidance
for management and AS No. 5 were
designed to make management
evaluations and ICFR audits more
effective and efficient. We believe that
an additional one-year deferral of the
auditor attestation report requirement
will benefit investors in non-accelerated
filers by helping those 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 investors in
non-accelerated filers may experience
benefits from the following economic
effects of the extension:
• Auditors of non-accelerated filers
will 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; 37
and
• Non-accelerated filers will 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.
B. Costs
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Under the amendments, investors in
non-accelerated filers will have to wait
longer than they would in the absence
of the deferral for the assurances
provided by the attestation report by the
companies’ auditor on management’s
report on ICFR. For example, several
commenters expressed concern that the
amendments may reduce investor
confidence in non-accelerated filers.38
However, we believe that the risk that
some investors may lose confidence in
non-accelerated filers is small because
the management reports on ICFR of
these companies, while not subject to
liability under section 18 of the
Exchange, will continue to be subject to
37 Several commenters also noted this benefit.
See, for example, letters from the Chamber of
Commerce and ICBA.
38 See letters from CalPERS, Hang Bui, John
DeGoey, Jared Galassini, Stacy Lulloff, Anthony
Morgan, Joshua Pike, Brandon Wagner and Jennifer
Welsh.
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other liability provisions of the
Exchange Act.
The amendments may also 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
effective. Two commenters argued the
amendments could increase the risk that
a weakness in a company’s ICFR would
not be detected or might be concealed
from investors.39 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.
No commenter provided cost
estimates for the proposed extension.
Several commenters, however, referred
to costs estimates prepared by a number
of sources regarding the costs of section
404 compliance generally.40 As
mentioned above, we are undertaking
our own study in part because these
prior cost estimates do not reflect the
recent efforts to make section 404
compliance more efficient.
V. Consideration of Impact on the
Economy, Burden on Competition and
Promotion of Efficiency, Competition
and Capital Formation
Section 23(a)(2) of the Exchange
Act 41 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) 42 of the Securities
Act and section 3(f) 43 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 the additional oneyear delay of the auditor attestation
report requirement will promote
efficiency and capital formation by
helping reduce inefficiencies and
transition costs for non-accelerated
filers. Several commenters stated that
the proposed extension would help
smaller companies reduce the overall
costs associated with the ICFR
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39 See
letters from E&Y and Michael Tolvstad.
for example, letters from CII and the SBA.
41 15 U.S.C. 78w(a).
42 15 U.S.C. 77b(b).
43 15 U.S.C. 78c(f).
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requirements.44 In addition, the delay
will provide us with the opportunity to
evaluate whether the new management
guidance and AS No. 5 are having the
intended effect of facilitating more
effective and efficient ICFR evaluations
and audits and to observe whether
further action is needed to improve the
effectiveness and efficiency of section
404 before non-accelerated filers begin
to incur costs. We expect the additional
one-year deferral of the auditor
attestation requirement to increase
efficiency by providing more time for
non-accelerated filers to prepare for
compliance with the section 404
requirements and by affording these
companies and their auditors time to
consider the PCAOB’s small company
ICFR audit guidance. Increased
efficiency may promote capital
formation and thereby benefit investors.
However, we acknowledge that the
deferral of the auditor attestation
requirement may cause some investors
to lose confidence in non-accelerated
filers, which could make it more
difficult for these companies to raise
capital in the public markets.
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 did not receive
any comments suggesting that this type
of impact has occurred as a result of the
prior extension or otherwise specifically
addressing the effect of the extension on
competition.
VI. Final Regulatory Flexibility
Analysis
We have prepared this Final
Regulatory Flexibility Analysis
(‘‘FRFA’’) in accordance with section
603 of the Regulatory Flexibility Act.45
This FRFA relates to amendments to the
following temporary provisions: Item
308T of Regulations 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.
Prior to these amendments, a nonaccelerated filer was scheduled to start
providing its auditor’s attestation report
on ICFR in its annual report for a fiscal
year ending on or after December 15,
2008. We are amending these forms and
temporary rules to require a nonaccelerated filer to start providing the
auditor attestation report on ICFR in its
40 See,
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44 See, for example, letters from U.S. Chamber of
Commerce and ICBA.
45 5 U.S.C. 603.
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annual reports for fiscal years ending on
or after December 15, 2009.
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A. Reasons for, and Objectives of, the
Amendments
The Commission is undertaking a
study to assess whether the new
management guidance and AS No. 5 are
having the intended effect of facilitating
more effective and efficient ICFR
evaluations and audits for smaller
reporting companies. We are amending
our forms and temporary rules to defer
implementation of the auditor
attestation report requirement for nonaccelerated filers for an additional year
for the following primary reasons:
• To enable non-accelerated filers
more time to gain efficiencies in
management’s evaluation of the
effectiveness of internal control over
financial reporting;
• To provide the Commission with
time to review the findings of its study
and to consider whether further action
to improve the effectiveness and
efficiency of Section 404
implementation is warranted;
• To provide the PCAOB time to
promulgate its guidance for ICFR audits
of smaller public companies in final
form; and
• To provide the auditors of nonaccelerated filers additional time to
consider such guidance.
The amendments aim to further the
goals of the Sarbanes-Oxley Act to
enhance the quality of public company
disclosure concerning the company’s
internal control over financial reporting
and increase investor confidence in the
financial markets.
B. Significant Issues Raised by Public
Comment
In the Proposing Release, we
requested comment on the number of
small entity issuers that may be affected,
the existence or nature of the potential
impact and how to quantify the impact
of the amendments. As mentioned
above, several commenters believed that
the extension would help smaller
companies reduce the overall costs
associated with the ICFR
requirements,46 but other commenters
argued that a further delay may affect
investor confidence in the ICFR of
smaller companies.47 We did receive
data from the Office of Advocacy of the
Small Business Administration on the
general costs of compliance related to
implementation of the section 404
requirements.48 However, this data did
not address the costs of delayed
46 See
footnote 44 above.
footnote 38 above.
48 See letter from SBA.
47 See
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implementation, and we are conducting
our own study to assess the costs that
reflect our recent efforts to make section
404 compliance more efficient.49
C. Small Entities Subject to the
Amendments
The amendments will affect some
issuers that are small entities. Exchange
Act Rule 0–10(a) 50 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 amendments will apply to any
small entity that is subject to reporting
under either section 13(a) or 15(d) of the
Exchange Act. One commenter
recommended that we use the definition
of ‘‘smaller reporting company’’ 51 in
Securities Act Rule 405 52 and Exchange
Act Rule 12b–2 53 to define ‘‘small
entity’’ for purposes of the FRFA.54
Although, we are not proposing any
amendments to the definition of small
entity in Exchange Act Rule 0–10(a) at
49 The SBA also recommended that we use the
results of our Section 404 study to update the Final
Regulatory Flexibility Act analysis of the internal
control reporting requirements included in the
original 2003 release adopting the rules
implementing section 404 (Release No. 33–8238 [68
FR 36636]). In evaluating the efficiency and
effectiveness of the section 404 requirements, we
will look to the results of our study, as well as other
information. We will also consider the results of our
study when we conduct a review under section 610
of the Regulatory Flexibility Act.
50 17 CFR 240.0–10(a).
51 A ‘‘small reporting company’’ is defined as an
issuer that is not an investment company, an assetbacked issuer (as defined in 17 CFR 229.1101), or
a majority-owned subsidiary of a parent that is not
a smaller reporting company and that: (1) Had a
public float of less than $75 million as of the last
business day of its most recently completed second
fiscal quarter, computed by multiplying the
aggregate worldwide number of shares of its voting
and non-voting common equity held by nonaffiliates by the price at which the common equity
was last sold, or the average of the bid and asked
prices of common equity, in the principal market
for the common equity; or (2) In the case of an
initial registration statement under the Securities
Act or Exchange Act for shares of its common
equity, had a public float of less than $75 million
as of a date within 30 days of the date of the filing
of the registration statement, computed by
multiplying the aggregate worldwide number of
such shares held by non-affiliates before the
registration plus, in the case of a Securities Act
registration statement, the number of such shares
included in the registration statement by the
estimated public offering price of the shares; or (3)
In the case of an issuer whose public float as
calculated under (1) or (2) was zero, had annual
revenues of less than $50 million during the most
recently completed fiscal year for which audited
financial statements are available.
52 17 CFR 230.405.
53 17 CFR 240.12b–2.
54 See letter from SBA.
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this time, we will consider in the future
whether any revisions to this definition
are warranted.
D. Reporting, Recordkeeping, and Other
Compliance Requirements
The amendments will 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.
E. Agency Action To Minimize Effect on
Small Entities
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 amendments, we considered
the following alternatives:
• Establishing different compliance or
reporting requirements or timetables
that take into account the resources
available to small entities;
• Clarifying, consolidating or
simplifying compliance and reporting
requirements under the rules for small
entities;
• Using performance rather than
design standards; and
• Exempting small entities from all or
part of the requirements.
In connection with the amendments,
we considered several of these
alternatives. One commenter
recommended that we should consider
a two-year extension for larger nonaccelerated filers and a three-year
extension for non-accelerated filers that
had market capitalizations of $25
million or less.55 The amendments
establish a different compliance and
reporting timetable for non-accelerated
filers and small entities from that of
other companies.
As discussed above, the amendments
are designed to allow non-accelerated
filers to avoid incurring unnecessary
compliance costs before we have the
benefit of analyzing the results of our
section 404 study, and to provide nonaccelerated filers and their auditors with
time to consider, and integrate the
concepts in the forthcoming PCAOB
smaller company ICFR audit guidance.
We anticipate that one year should
adequate.
We believe that the amendments will
promote the primary goal of enhancing
the quality of reporting and increasing
investor confidence in the fairness and
integrity of the securities markets.
Exempting small entities entirely from
55 See
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the requirements of section 404(b) may
be contrary to this goal.
An exemption from the amendments
delaying compliance with the auditor
attestation requirement, on the other
hand, would be inconsistent with one of
the goals of our study to determine
whether further action to improve the
effectiveness and efficiency of section
404 implementation is warranted before
smaller companies have begun to incur
independent auditor costs to perform
integrated audits of their financial
statements and ICFR.
VII. Statutory Authority and Text of the
Amendments
The amendments described in this
release are adopted 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.
List of Subjects
I b. Revising the date ‘‘December 15,
2008’’ in newly redesignated paragraph
(a) to read ‘‘December 15, 2009’’; and
I c. Revising newly redesignated
paragraph (b).
The revision reads as follows:
§ 210.2–02T Accountants’ reports and
attestation reports on internal control over
financial reporting.
*
*
*
*
*
(b) This section expires on June 30,
2010.
PART 228—INTEGRATED
DISCLOSURE SYSTEM FOR SMALL
BUSINESS ISSUERS
3. The authority citation for part 228
continues to read, in part, as follows:
I
Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j,
77k, 77s, 77z–2, 77z–3, 77aa(25), 77aa(26),
77ddd, 77eee, 77ggg, 77hhh, 77jjj, 77nnn,
77sss, 78l, 78m, 78n, 78o, 78u–5, 78w, 78ll,
78mm, 80a–8, 80a–29, 80a–30, 80a–37, 80b–
11, and 7201 et. seq., and 18 U.S.C. 1350.
17 CFR Part 210
*
Accountants, Accounting, Reporting
and recordkeeping requirements,
Securities.
I
17 CFR Part 228
§ 228.308T (Item 308T) Internal control
over financial reporting.
Reporting and recordkeeping
requirements, Securities, Small
businesses.
*
*
*
*
4. Section 228.308T is amended by
revising the ‘‘Note to Item 308T’’ and
paragraph (c) to read as follows:
17 CFR Parts 229 and 249
Note to Item 308T: This is a special
temporary section that applies only to a fiscal
period ending on or after December 15, 2007
but before March 15, 2009.
Reporting and recordkeeping
requirements, Securities.
*
Text of Amendments
For the reasons set out in the
preamble, the Commission is amending
title 17, chapter II, of the Code of
Federal Regulations as follows:
I
PART 210—FORM AND CONTENT OF
AND REQUIREMENTS FOR FINANCIAL
STATEMENTS, SECURITIES ACT OF
1933, SECURITIES EXCHANGE ACT
OF 1934, PUBLIC UTILITY HOLDING
COMPANY ACT OF 1935, INVESTMENT
COMPANY ACT OF 1940, INVESTMENT
ADVISERS ACT OF 1940, AND
ENERGY POLICY AND
CONSERVATION ACT OF 1975
1. The authority citation for part 210
continues to read as follows:
sroberts on PROD1PC70 with RULES
I
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s,
77z–2, 77z–3, 77aa(25), 77aa(26), 78c, 78j–1,
78l, 78m, 78n, 78o(d), 78q, 78u–5, 78w(a),
78ll, 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.
2. Section 210.2–02T is amended by:
a. Removing paragraphs (a) and (b),
and redesignating paragraphs (c) and (d)
as paragraphs (a) and (b);
I
I
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*
*
*
*
(c) This temporary Item 308T, and
accompanying note and instructions,
will expire on March 15, 2009.
PART 229—STANDARD
INSTRUCTIONS FOR FILING FORMS
UNDER SECURITIES ACT OF 1933,
SECURITIES EXCHANGE ACT OF 1934
AND ENERGY POLICY AND
CONSERVATION ACT OF 1975—
REGULATION S–K
5. The authority citation for part 229
continues to read, in part, as follows:
I
Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j,
77k, 77s, 77z–2, 77z–3, 77aa(25), 77aa(26),
77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj,
77nnn, 77sss, 78c, 78i, 78j, 78l, 78m, 78n,
78o, 78u–5, 78w, 78ll, 78mm, 80a–8, 80a–9,
80a–20, 80a–29, 80a–30, 80a–31(c), 80a–37,
80a–38(a), 80a–39, 80b–11, and 7201 et. seq.;
and 18 U.S.C. 1350, unless otherwise noted.
*
*
*
*
*
I 6. Section 229.308T is amended by
revising the ‘‘Note to Item 308T’’ and
paragraph (c) to read as follows:
§ 229.308T (Item 308T) Internal control
over financial reporting.
Note to Item 308T: This is a special
temporary section that applies only to a
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38099
registrant that is neither a ‘‘large accelerated
filer’’ nor an ‘‘accelerated filer’’ as those
terms are defined in § 240.12b–2 of this
chapter and only with respect to a fiscal
period ending on or after December 15, 2007,
but before December 15, 2009.
*
*
*
*
*
(c) This temporary Item 308T, and
accompanying note and instructions,
will expire on June 30, 2010.
PART 249—FORMS, SECURITIES
EXCHANGE ACT OF 1934
7. The general authority citation for
Part 249 is revised to read as follows:
I
Authority: 15 U.S.C. 78a et seq. and 7201
et seq.; and 18 U.S.C. 1350, unless otherwise
noted.
*
*
*
*
*
8. Form 20–F (referenced in
§ 249.220f), Part II, Item 15T is amended
by:
I a. Revising the date ‘‘December 15,
2008’’ in paragraph (2) to the ‘‘Note to
Item 15T’’ to read ‘‘December 15, 2009’’;
and
I b. Revising the date ‘‘June 30, 2009’’
in paragraph (d) to read ‘‘June 30,
2010’’.
I
Note: The text of Form 20–F does not, and
this amendment will not, appear in the Code
of Federal Regulations.
9. Form 40–F (referenced in
§ 249.240f) is amended by:
I 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
I b. Revising the date ‘‘June 30, 2009’’
in the paragraph following ‘‘Instruction
3T’’ to the ‘‘Instructions to paragraphs
(b), (c), (d) and (e) of General Instruction
B.(6)’’ to read ‘‘June 30, 2010’’.
I
Note: The text of Form 40–F does not, and
this amendment will not, appear in the Code
of Federal Regulations.
10. Form 10–Q (referenced in
§ 249.308a) is amended by revising Item
4T to Part I to read as follows:
I
Note: The text of Form 10–Q does not, and
this amendment will not, appear in the Code
of Federal Regulations.
Form 10–Q
*
*
*
*
*
PART I—FINANCIAL INFORMATION
*
*
*
*
*
Item 4T. Controls and Procedures
(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
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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.
(b) This temporary Item 4T will expire
on June 30, 2010.
*
*
*
*
*
11. Form 10–QSB (referenced in
§ 249.308b) is amended by revising Item
3A(T) to Part I to read as follows:
I
Note: The text of Form 10–QSB does not,
and this amendment will not, appear in the
Code of Federal Regulations.
Form 10–QSB
*
*
*
*
*
PART I—FINANCIAL INFORMATION
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*
*
*
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*
*
18:40 Jul 01, 2008
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Item 3A(T). Controls and Procedures
(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.
(b) This temporary Item 3A(T) will
expire on October 31, 2008.
*
*
*
*
*
I 12. Form 10–K (referenced in
§ 249.310) is amended by:
I a. Revising the date ‘‘December 15,
2008’’ in paragraph (a) to Item 9A(T) to
Part II to read ‘‘December 15, 2009’’; and
I b. Revising the date ‘‘June 30, 2009’’
in paragraph (b) to Item 9A(T) to Part II
to read ‘‘June 30, 2010’’.
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Note: The text of Form 10–K does not, and
this amendment will not, appear in the Code
of Federal Regulations.
13. Form 10–KSB (referenced in
§ 249.310b) is amended by revising the
dates ‘‘December 15, 2008’’ in paragraph
(a), and ‘‘June 30, 2009’’ in paragraph (b)
to Item 8A(T) to Part II to read ‘‘March
15, 2009’’.
I
Note: The text of Form 10–KSB does not,
and this amendment will not, appear in the
Code of Federal Regulations.
By the Commission.
Dated: June 26, 2008.
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8–14942 Filed 7–1–08; 8:45 am]
BILLING CODE 8010–01–P
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]]>Agencies
[Federal Register Volume 73, Number 128 (Wednesday, July 2, 2008)]
[Rules and Regulations]
[Pages 38094-38100]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-14942]
[[Page 38093]]
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Part IV
Securities and Exchange Commission
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17 CFR Parts 210, 228, 229 and 249
Internal Control Over Financial Reporting in Exchange Act Periodic
Reports of Non-Accelerated Filers; Final Rule
Federal Register / Vol. 73, No. 128 / Wednesday, July 2, 2008 / Rules
and Regulations
[[Page 38094]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 210, 228, 229 and 249
[Release Nos. 33-8934; 34-58028; File No. S7-06-03]
RIN 3235-AJ64
Internal Control Over Financial Reporting in Exchange Act
Periodic Reports of Non-Accelerated Filers
AGENCY: Securities and Exchange Commission.
ACTION: Final rules.
-----------------------------------------------------------------------
SUMMARY: We are adopting amendments to temporary rules that were
published on December 21, 2006, in Release No. 33-8760 [71 FR 76580].
Those temporary rules require companies that are non-accelerated filers
to include in their annual reports, pursuant to rules implementing
section 404(b) of the Sarbanes-Oxley Act of 2002, an attestation report
of their independent auditors on internal control over financial
reporting for fiscal years ending on or after December 15, 2008. Under
the amendments, a non-accelerated filer will be required to file the
auditor's attestation report on internal control over financial
reporting when it files an annual report for a fiscal year ending on or
after December 15, 2009.
DATES: Effective Dates: The amendments are effective September 2, 2008,
except Form 10-QSB will be effective from September 2, 2008 to October
31, 2008; Sec. 228.308T and Form 10-KSB will be effective from
September 2, 2008 to March 15, 2009; and Sec. Sec. 210.2-02T and
229.308T, Form 20-F, Form 40-F, Form 10-Q, and Form 10-K will be
effective from September 2, 2008 to June 30, 2010.
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: We are adopting amendments to the following
forms and temporary rules: Rule 2-02T of Regulation S-X,\1\ Item 308T
of Regulations 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\
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\1\ 17 CFR 210-2.02T.
\2\ 17 CFR 229.308T.
\3\ 17 CFR 228.310T.
\4\ 17 CFR 249.308a.
\5\ 17 CFR 249.308b.
\6\ 17 CFR 249.310.
\7\ 17 CFR 249.310b.
\8\ 17 CFR 249.220f.
\9\ 17 CFR 249.240f.
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I. Background
In February 2008,\10\ we proposed an extension of the section
404(b) auditor attestation requirement for non-accelerated filers.\11\
This proposal followed an action we took in December 2006\12\ to extend
the dates by which non-accelerated filers must begin to comply with the
internal control over financial reporting (``ICFR'') requirements
mandated by Section 404 of the Sarbanes-Oxley Act of 2002.\13\
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.\14\ 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.\15\ 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'').
---------------------------------------------------------------------------
\10\ See Release No. 33-8889 (February 1, 2008) [73 FR 7450].
\11\ Although the term ``non-accelerated filer'' is not defined
in our rules, we use it throughout this release to refer to an
Exchange Act reporting company that does not meet the Rule 12b-2
definition of either an ``accelerated filer'' or a ``large
accelerated filer.''
\12\ See Release No. 33-8760 (December 15, 2006) [71 FR 76580]
(the ``2006 Release'').
\13\ 15 U.S.C. 7262.
\14\ 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].
\15\ 17 CFR 229.308(b).
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In the 2006 Release, we cited two primary reasons for deferring
implementation of the auditor attestation report requirement for an
additional year after implementation of the management report
requirement. First, we stated that the deferred implementation would
afford non-accelerated filers and their auditors the benefit of
anticipated changes by the PCAOB to AS No. 2, subject to Commission
approval, as well as any implementation guidance that the PCAOB issued
for auditors of smaller public companies.
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.\16\
---------------------------------------------------------------------------
\16\ 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.
---------------------------------------------------------------------------
On June 20, 2007, we approved the issuance of interpretive guidance
regarding management's report on ICFR\17\ and adopted rule
amendments\18\ 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.
---------------------------------------------------------------------------
\17\ Release No. 33-8810 (Jun. 20, 2007) [72 FR 35324].
\18\ 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)].
---------------------------------------------------------------------------
In addition, on July 25, 2007, we approved the PCAOB's Auditing
Standard No. 5 (``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, is intended to make evaluations
of ICFR and ICFR audits more effective and efficient by being risk-
based and scalable to a company's size and complexity.
On February 1, 2008, we proposed a one-year extension of the
Section 404(b)
[[Page 38095]]
auditor attestation requirement for non-accelerated filers in view of
the fact that there were still some additional actions that the
Commission and PCAOB intended to take with respect to implementation of
the section 404 requirements, and of concerns expressed by some about
the orderly and efficient implementation of the ICFR requirements.\19\
---------------------------------------------------------------------------
\19\ 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.
---------------------------------------------------------------------------
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 comment period on
the PCAOB's guidance ended on December 17, 2007, and the PCAOB is
working on the final guidance.
---------------------------------------------------------------------------
\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 http://
www.pcaobus.org.
---------------------------------------------------------------------------
Another action involves a study that we are undertaking to help
determine whether our new management guidance on evaluating ICFR and AS
No. 5 are having the intended effect of facilitating more cost-
effective ICFR evaluations and audits for smaller reporting companies.
Our study plan includes gathering new data from a broad array of
companies about the costs and benefits of compliance with the ICFR
requirements. The study will pay special attention to those smaller
companies that are complying with the ICFR requirements for the first
time.
One part of the study will consist of a web-based survey of all
companies to which the section 404 requirements apply. Participation in
this survey will be voluntary. Another part of the study will involve
the Commission staff conducting in-depth interviews of a small number
of interested parties. We are targeting the fall of 2008 for the
initial release of findings.
We have received letters from a total of 67 commenters on the
proposal to further extend the section 404(b) auditor attestation
requirement for non-accelerated filers.\21\ Approximately half of the
commenters supported the proposed one-year extension,\22\ and half
opposed a further delay in compliance with the section 404(b)
requirements by non-accelerated filers.\23\ Many of the commenters that
supported the proposed extension agreed that the one-year deferral was
appropriate in light of our upcoming study. Absent the extension that
we are granting in this release, many non-accelerated filers would have
begun to incur independent auditor costs for fiscal years ending on or
after December 15, 2008, before we had the opportunity to observe
whether further action to improve the effectiveness and efficiency of
section 404 implementation is warranted. In addition, several
commenters that supported the proposed extension also believed the
extension was necessary to provide additional time for companies and
their auditors to consider the PCAOB's guidance on the ICFR audits of
smaller public companies.\24\ Another commenter,\25\ while neither
supporting nor opposing the proposed extension, suggested that the
Commission should limit the extension to companies that qualify as a
``smaller reporting company'' under Exchange Act Rule 12b-2.\26\
---------------------------------------------------------------------------
\21\ The public comments we received are available for
inspection in the Commission's Public Reference Room at 100 F
Street, NE., Washington DC 20549 in File No. S7-06-03. They are also
available on-line at http://www.sec.gov/rules/proposed/s70603.shtml.
Of the 67 commenters, 49 were graduate and undergraduate students at
the University of Wisconsin-La Crosse. More than half of the
students opposed the proposed extension.
\22\ See, for example, letters from the U.S. Chamber of
Commerce, First National Bank of Groton (NY), Mark Hart, Independent
Community Bankers of America (``ICBA''), International Association
of Small Broker Dealers and Advisors (``IASBD''), Kyle Kaja, George
Merkl, New York State Society of Certified Public Accountants
(``NYSSCPA''), Melissa Palmer, Maria Romundstad, the Office of
Advocacy of the Small Business Administration (``SBA''), Small
Business and Entrepreneurship Council (``SBEC''), David Tews and
Jordan Walt.
\23\ See, for example, letters from Kevin Burgess, California
Public Employees' Retirement System (``CalPERS''), Council of
Institutional Investors (``CII''), Daniel DeGier, Christopher Fearn,
Jared Galassini and Anna Wildenberg.
\24\ See, for example, letters from the U.S. Chamber of
Commerce, ICBA and Nicole Nederloe.
\25\ See letter from Ernst & Young LLP(``E&Y'').
\26\ See 17 CFR 240.12b-2. Although there is considerable
overlap between companies that meet the definition of a ``smaller
reporting company'' in Exchange Act Rule 12b-2 and companies that
are non-accelerated filers because they fall outside the definitions
of ``accelerated filer'' and ``large accelerated filer,'' the terms
``smaller reporting company'' and ``non-accelerated filer'' are not
synonymous. For example, a company that has publicly issued a class
of debt securities, but does not have a class of equity securities
outstanding would be a non-accelerated filer even though it may not
meet the definition of a ``smaller reporting company.'' Many
companies that are debt-only issuers, however, are subsidiaries of
larger public companies that meet the definition of accelerated
filer or large accelerated filer. Therefore, we do not believe it
necessary for purposes of this extension to make a distinction
between non-accelerated filers and smaller reporting companies.
---------------------------------------------------------------------------
Many of the commenters opposed to the proposed extension thought
that non-accelerated filers have had adequate time to prepare for full
compliance with the Section 404 requirements.\27\ Several commenters
opposed to the proposed extension also claimed that it was unnecessary
for the Commission to undertake a study because several studies on the
topic already have been completed, including some studies that reported
evidence from surveys.\28\
---------------------------------------------------------------------------
\27\ See, for example, the letters from CII, Jared Galassini,
Joshua Pike, and Jennifer Welsh.
\28\ See, for example, the letters from CII and Michael
Tolvstad.
---------------------------------------------------------------------------
We believe that an additional one-year deferral of the auditor
attestation requirement is appropriate so that non-accelerated filers
do not incur unnecessary compliance costs. An additional one-year
deferral will allow these companies additional time to consider the
PCAOB's guidance on ICFR audits of smaller public companies when it is
finalized, as well as additional time for the auditors of non-
accelerated filers to incorporate such guidance in their planning and
conduct of their ICFR audits for 2009. The planned study is designed to
elicit information on the recent compliance experiences of companies
that is not available in the various earlier studies, including those
that use evidence from surveys.\29\
---------------------------------------------------------------------------
\29\ A key objective of the planned survey is to enable the
Commission staff to evaluate any response bias that might cause the
responses to over-represent the experiences of a particular sub-
sample of companies, as opposed to the companies that are affected
by the Section 404 requirements more generally.
---------------------------------------------------------------------------
II. Extension of Auditor Attestation Compliance Date for Non-
Accelerated Filers
After consideration of the public comments that were received, we
are adopting the one-year extension of the auditor attestation report
requirement
[[Page 38096]]
substantially as proposed. We are amending Item 308T of Regulations S-K
and S-B, 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. A non-accelerated filer will 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.\30\
---------------------------------------------------------------------------
\30\ See Items 308T(a)(4) of Regulations S-K and S-B.
---------------------------------------------------------------------------
In the Proposing Release, we also requested comment on whether
management's report on ICFR should be ``filed'' rather than
``furnished'' and not be subject to liability under Section 18 of the
Exchange Act \31\ during the second year of a non-accelerated filer's
compliance with the ICFR requirements under section 404(a) if we
adopted the proposed extension. Two commenters argued that we should
discontinue treating the management report on ICFR as ``furnished''
rather than ``filed'' because the protection was not needed for the
second year of the section 404(b) extension \32\ Three commenters
believed that we should continue to allow the management report on ICFR
of non-accelerated filers to be ``furnished'' rather than ``filed''
because non-accelerated filers should not be subject to liability under
Section 18 until such time that they have had their ICFR attested to by
their auditor.\33\
---------------------------------------------------------------------------
\31\ 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.
\32\ See letters from CalPERS and E&Y.
\33\ See letters from the U.S. Chamber of Commerce, CommBancorp,
Inc. and George Merkl.
---------------------------------------------------------------------------
We recognize that a non-accelerated filer that files only a
management report on ICFR may become subject to more second-guessing as
a result of separating the management and auditor reports. Management
may conclude that the company's ICFR is effective when the management
report is filed without the auditor's attestation report, but the
company's auditor may come to a contrary conclusion in its report filed
in a subsequent year, and as a result, the company's previous
assessment may be called into question. To reduce the liability risk
associated with such second-guessing, we believe that until such time
as non-accelerated filers are required to comply with both the section
404(a) and 404(b) requirements, it is reasonable to continue the
temporary liability distinction and treat the management report as
``furnished'' rather than ``filed.'' Therefore, we also have decided to
extend the amendments that cause a non-accelerated filer's management
report on ICFR to be ``furnished'' rather than ``filed.'' Of course,
material misstatements or omissions in management's report on ICFR,
regardless of whether the report is ``furnished'' or ``filed,'' are
subject to liability under section 10(b) and Rule 10b-5 under the
Exchange Act.\34\
---------------------------------------------------------------------------
\34\ See 15 U.S.C. 78j(b) and 17 CFR 240.10b-5.
---------------------------------------------------------------------------
The revised compliance dates for the Section 404 internal control
requirements are presented in the table below:
------------------------------------------------------------------------
Compliance dates for the internal control
over financial reporting requirements
-------------------------------------------
Filer status Auditor attestation
Management report on on management's
ICFR report on ICFR
------------------------------------------------------------------------
U.S. Issuer:
Non-accelerated filer Annual reports for Annual reports for
(public float under $75 fiscal years ending fiscal years ending
million). on or after on or after
December 15, 2007. December 15, 2009.
Large accelerated filer Annual reports for Annual reports for
and accelerated filer fiscal years ending fiscal years ending
(public float above $75 on or after on or after
million). November 15, 2004. November 15, 2004.
Foreign private issuer:
Non-accelerated filer Annual reports for Annual reports for
(public float under $75 fiscal years ending fiscal years ending
million). on or after on or after
December 15, 2007. December 15, 2009.
Accelerated filer Annual reports for Annual reports for
(public float above $75 fiscal years ending fiscal years ending
million and below $700 on or after July on or after July
million). 15, 2006. 15, 2007.
Large accelerated filer Annual reports for Annual reports for
(public float above fiscal years ending fiscal years ending
$700 million). on or after July on or after July
15, 2006. 15, 2006.
U.S. or foreign private
issuer:
Newly public company.... Second annual report Second annual
report.
------------------------------------------------------------------------
III. Paperwork Reduction Act
In connection with our original proposal and adoption of the rules
and amendments implementing the section 404 requirements,\35\ 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'') \36\ and
received approval of these estimates. We do not believe that the
amendments will result in any change in the collection of information
requirements of the amendments implementing section 404 and we received
no comments suggesting the amendments would result in any change.
Therefore, we are not revising our PRA burden and cost estimates
submitted to the OMB.
---------------------------------------------------------------------------
\35\ See Release No. 33-8138 (October 22, 2002) [67 FR 66208]
and Release No. 33-8238 (June 5, 2003) [68 FR 36636].
\36\ 44 U.S.C. 3501 et seq. and 5 CFR 1320.11.
---------------------------------------------------------------------------
IV. Cost-Benefit Analysis
A. Benefits
The amendments will postpone for one year the date by which a non-
accelerated filer must begin to include in its annual report an auditor
attestation report on management's assessment of internal control over
financial reporting. As a result, non-accelerated filers will be
required to complete only management's assessment in the first and
second year
[[Page 38097]]
of their compliance with the section 404 requirements.
We are undertaking a study to help assess whether the new
management guidance and AS No. 5 are having the intended effect of
facilitating more effective and efficient ICFR evaluations and audits
for smaller reporting companies. Our interpretive guidance for
management and AS No. 5 were designed to make management evaluations
and ICFR audits more effective and efficient. We believe that an
additional one-year deferral of the auditor attestation report
requirement will benefit investors in non-accelerated filers by helping
those 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 investors in non-accelerated filers may experience
benefits from the following economic effects of the extension:
Auditors of non-accelerated filers will 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; \37\ and
---------------------------------------------------------------------------
\37\ Several commenters also noted this benefit. See, for
example, letters from the Chamber of Commerce and ICBA.
---------------------------------------------------------------------------
Non-accelerated filers will 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.
B. Costs
Under the amendments, investors in non-accelerated filers will have
to wait longer than they would in the absence of the deferral for the
assurances provided by the attestation report by the companies' auditor
on management's report on ICFR. For example, several commenters
expressed concern that the amendments may reduce investor confidence in
non-accelerated filers.\38\ However, we believe that the risk that some
investors may lose confidence in non-accelerated filers is small
because the management reports on ICFR of these companies, while not
subject to liability under section 18 of the Exchange, will continue to
be subject to other liability provisions of the Exchange Act.
---------------------------------------------------------------------------
\38\ See letters from CalPERS, Hang Bui, John DeGoey, Jared
Galassini, Stacy Lulloff, Anthony Morgan, Joshua Pike, Brandon
Wagner and Jennifer Welsh.
---------------------------------------------------------------------------
The amendments may also 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 effective. Two commenters argued the amendments
could increase the risk that a weakness in a company's ICFR would not
be detected or might be concealed from investors.\39\ 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.
---------------------------------------------------------------------------
\39\ See letters from E&Y and Michael Tolvstad.
---------------------------------------------------------------------------
No commenter provided cost estimates for the proposed extension.
Several commenters, however, referred to costs estimates prepared by a
number of sources regarding the costs of section 404 compliance
generally.\40\ As mentioned above, we are undertaking our own study in
part because these prior cost estimates do not reflect the recent
efforts to make section 404 compliance more efficient.
---------------------------------------------------------------------------
\40\ See, for example, letters from CII and the SBA.
---------------------------------------------------------------------------
V. Consideration of Impact on the Economy, Burden on Competition and
Promotion of Efficiency, Competition and Capital Formation
Section 23(a)(2) of the Exchange Act \41\ 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) \42\ of the Securities Act and section
3(f) \43\ 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.
---------------------------------------------------------------------------
\41\ 15 U.S.C. 78w(a).
\42\ 15 U.S.C. 77b(b).
\43\ 15 U.S.C. 78c(f).
---------------------------------------------------------------------------
We believe that the additional one-year delay of the auditor
attestation report requirement will promote efficiency and capital
formation by helping reduce inefficiencies and transition costs for
non-accelerated filers. Several commenters stated that the proposed
extension would help smaller companies reduce the overall costs
associated with the ICFR requirements.\44\ In addition, the delay will
provide us with the opportunity to evaluate whether the new management
guidance and AS No. 5 are having the intended effect of facilitating
more effective and efficient ICFR evaluations and audits and to observe
whether further action is needed to improve the effectiveness and
efficiency of section 404 before non-accelerated filers begin to incur
costs. We expect the additional one-year deferral of the auditor
attestation requirement to increase efficiency by providing more time
for non-accelerated filers to prepare for compliance with the section
404 requirements and by affording these companies and their auditors
time to consider the PCAOB's small company ICFR audit guidance.
Increased efficiency may promote capital formation and thereby benefit
investors. However, we acknowledge that the deferral of the auditor
attestation requirement may cause some investors to lose confidence in
non-accelerated filers, which could make it more difficult for these
companies to raise capital in the public markets.
---------------------------------------------------------------------------
\44\ See, for example, letters from U.S. Chamber of Commerce and
ICBA.
---------------------------------------------------------------------------
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
did not receive any comments suggesting that this type of impact has
occurred as a result of the prior extension or otherwise specifically
addressing the effect of the extension on competition.
VI. Final Regulatory Flexibility Analysis
We have prepared this Final Regulatory Flexibility Analysis
(``FRFA'') in accordance with section 603 of the Regulatory Flexibility
Act.\45\ This FRFA relates to amendments to the following temporary
provisions: Item 308T of Regulations 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. Prior to
these amendments, a non-accelerated filer was scheduled to start
providing its auditor's attestation report on ICFR in its annual report
for a fiscal year ending on or after December 15, 2008. We are amending
these forms and temporary rules to require a non-accelerated filer to
start providing the auditor attestation report on ICFR in its
[[Page 38098]]
annual reports for fiscal years ending on or after December 15, 2009.
---------------------------------------------------------------------------
\45\ 5 U.S.C. 603.
---------------------------------------------------------------------------
A. Reasons for, and Objectives of, the Amendments
The Commission is undertaking a study to assess whether the new
management guidance and AS No. 5 are having the intended effect of
facilitating more effective and efficient ICFR evaluations and audits
for smaller reporting companies. We are amending our forms and
temporary rules to defer implementation of the auditor attestation
report requirement for non-accelerated filers for an additional year
for the following primary reasons:
To enable non-accelerated filers more time to gain
efficiencies in management's evaluation of the effectiveness of
internal control over financial reporting;
To provide the Commission with time to review the findings
of its study and to consider whether further action to improve the
effectiveness and efficiency of Section 404 implementation is
warranted;
To provide the PCAOB time to promulgate its guidance for
ICFR audits of smaller public companies in final form; and
To provide the auditors of non-accelerated filers
additional time to consider such guidance.
The amendments aim to further the goals of the Sarbanes-Oxley Act
to enhance the quality of public company disclosure concerning the
company's internal control over financial reporting and increase
investor confidence in the financial markets.
B. Significant Issues Raised by Public Comment
In the Proposing Release, we requested comment on the number of
small entity issuers that may be affected, the existence or nature of
the potential impact and how to quantify the impact of the amendments.
As mentioned above, several commenters believed that the extension
would help smaller companies reduce the overall costs associated with
the ICFR requirements,\46\ but other commenters argued that a further
delay may affect investor confidence in the ICFR of smaller
companies.\47\ We did receive data from the Office of Advocacy of the
Small Business Administration on the general costs of compliance
related to implementation of the section 404 requirements.\48\ However,
this data did not address the costs of delayed implementation, and we
are conducting our own study to assess the costs that reflect our
recent efforts to make section 404 compliance more efficient.\49\
---------------------------------------------------------------------------
\46\ See footnote 44 above.
\47\ See footnote 38 above.
\48\ See letter from SBA.
\49\ The SBA also recommended that we use the results of our
Section 404 study to update the Final Regulatory Flexibility Act
analysis of the internal control reporting requirements included in
the original 2003 release adopting the rules implementing section
404 (Release No. 33-8238 [68 FR 36636]). In evaluating the
efficiency and effectiveness of the section 404 requirements, we
will look to the results of our study, as well as other information.
We will also consider the results of our study when we conduct a
review under section 610 of the Regulatory Flexibility Act.
---------------------------------------------------------------------------
C. Small Entities Subject to the Amendments
The amendments will affect some issuers that are small entities.
Exchange Act Rule 0-10(a) \50\ 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 amendments will
apply to any small entity that is subject to reporting under either
section 13(a) or 15(d) of the Exchange Act. One commenter recommended
that we use the definition of ``smaller reporting company'' \51\ in
Securities Act Rule 405 \52\ and Exchange Act Rule 12b-2 \53\ to define
``small entity'' for purposes of the FRFA.\54\ Although, we are not
proposing any amendments to the definition of small entity in Exchange
Act Rule 0-10(a) at this time, we will consider in the future whether
any revisions to this definition are warranted.
---------------------------------------------------------------------------
\50\ 17 CFR 240.0-10(a).
\51\ A ``small reporting company'' is defined as an issuer that
is not an investment company, an asset-backed issuer (as defined in
17 CFR 229.1101), or a majority-owned subsidiary of a parent that is
not a smaller reporting company and that: (1) Had a public float of
less than $75 million as of the last business day of its most
recently completed second fiscal quarter, computed by multiplying
the aggregate worldwide number of shares of its voting and non-
voting common equity held by non-affiliates by the price at which
the common equity was last sold, or the average of the bid and asked
prices of common equity, in the principal market for the common
equity; or (2) In the case of an initial registration statement
under the Securities Act or Exchange Act for shares of its common
equity, had a public float of less than $75 million as of a date
within 30 days of the date of the filing of the registration
statement, computed by multiplying the aggregate worldwide number of
such shares held by non-affiliates before the registration plus, in
the case of a Securities Act registration statement, the number of
such shares included in the registration statement by the estimated
public offering price of the shares; or (3) In the case of an issuer
whose public float as calculated under (1) or (2) was zero, had
annual revenues of less than $50 million during the most recently
completed fiscal year for which audited financial statements are
available.
\52\ 17 CFR 230.405.
\53\ 17 CFR 240.12b-2.
\54\ See letter from SBA.
---------------------------------------------------------------------------
D. Reporting, Recordkeeping, and Other Compliance Requirements
The amendments will 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.
E. Agency Action To Minimize Effect on Small Entities
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
amendments, we considered the following alternatives:
Establishing different compliance or reporting
requirements or timetables that take into account the resources
available to small entities;
Clarifying, consolidating or simplifying compliance and
reporting requirements under the rules for small entities;
Using performance rather than design standards; and
Exempting small entities from all or part of the
requirements.
In connection with the amendments, we considered several of these
alternatives. One commenter recommended that we should consider a two-
year extension for larger non-accelerated filers and a three-year
extension for non-accelerated filers that had market capitalizations of
$25 million or less.\55\ The amendments establish a different
compliance and reporting timetable for non-accelerated filers and small
entities from that of other companies.
---------------------------------------------------------------------------
\55\ See letter from IASBD.
---------------------------------------------------------------------------
As discussed above, the amendments are designed to allow non-
accelerated filers to avoid incurring unnecessary compliance costs
before we have the benefit of analyzing the results of our section 404
study, and to provide non-accelerated filers and their auditors with
time to consider, and integrate the concepts in the forthcoming PCAOB
smaller company ICFR audit guidance. We anticipate that one year should
adequate.
We believe that the amendments will promote the primary goal of
enhancing the quality of reporting and increasing investor confidence
in the fairness and integrity of the securities markets. Exempting
small entities entirely from
[[Page 38099]]
the requirements of section 404(b) may be contrary to this goal.
An exemption from the amendments delaying compliance with the
auditor attestation requirement, on the other hand, would be
inconsistent with one of the goals of our study to determine whether
further action to improve the effectiveness and efficiency of section
404 implementation is warranted before smaller companies have begun to
incur independent auditor costs to perform integrated audits of their
financial statements and ICFR.
VII. Statutory Authority and Text of the Amendments
The amendments described in this release are adopted 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.
List of Subjects
17 CFR Part 210
Accountants, Accounting, Reporting and recordkeeping requirements,
Securities.
17 CFR Part 228
Reporting and recordkeeping requirements, Securities, Small
businesses.
17 CFR Parts 229 and 249
Reporting and recordkeeping requirements, Securities.
Text of Amendments
0
For the reasons set out in the preamble, the Commission is amending
title 17, chapter II, of the Code of Federal Regulations as follows:
PART 210--FORM AND CONTENT OF AND REQUIREMENTS FOR FINANCIAL
STATEMENTS, SECURITIES ACT OF 1933, SECURITIES EXCHANGE ACT OF
1934, PUBLIC UTILITY HOLDING COMPANY ACT OF 1935, INVESTMENT
COMPANY ACT OF 1940, INVESTMENT ADVISERS ACT OF 1940, AND ENERGY
POLICY AND CONSERVATION ACT OF 1975
0
1. The authority citation for part 210 continues to read as follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-3,
77aa(25), 77aa(26), 78c, 78j-1, 78l, 78m, 78n, 78o(d), 78q, 78u-5,
78w(a), 78ll, 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.
0
2. Section 210.2-02T is amended by:
0
a. Removing paragraphs (a) and (b), and redesignating paragraphs (c)
and (d) as paragraphs (a) and (b);
0
b. Revising the date ``December 15, 2008'' in newly redesignated
paragraph (a) to read ``December 15, 2009''; and
0
c. Revising newly redesignated paragraph (b).
The revision reads as follows:
Sec. 210.2-02T Accountants' reports and attestation reports on
internal control over financial reporting.
* * * * *
(b) This section expires on June 30, 2010.
PART 228--INTEGRATED DISCLOSURE SYSTEM FOR SMALL BUSINESS ISSUERS
0
3. The authority citation for part 228 continues to read, in part, as
follows:
Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2,
77z-3, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77jjj, 77nnn,
77sss, 78l, 78m, 78n, 78o, 78u-5, 78w, 78ll, 78mm, 80a-8, 80a-29,
80a-30, 80a-37, 80b-11, and 7201 et. seq., and 18 U.S.C. 1350.
* * * * *
0
4. Section 228.308T is amended by revising the ``Note to Item 308T''
and paragraph (c) to read as follows:
Sec. 228.308T (Item 308T) Internal control over financial reporting.
Note to Item 308T: This is a special temporary section that
applies only to a fiscal period ending on or after December 15, 2007
but before March 15, 2009.
* * * * *
(c) This temporary Item 308T, and accompanying note and
instructions, will expire on March 15, 2009.
PART 229--STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES
ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY POLICY AND
CONSERVATION ACT OF 1975--REGULATION S-K
0
5. The authority citation for part 229 continues to read, in part, as
follows:
Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2,
77z-3, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj,
77nnn, 77sss, 78c, 78i, 78j, 78l, 78m, 78n, 78o, 78u-5, 78w, 78ll,
78mm, 80a-8, 80a-9, 80a-20, 80a-29, 80a-30, 80a-31(c), 80a-37, 80a-
38(a), 80a-39, 80b-11, and 7201 et. seq.; and 18 U.S.C. 1350, unless
otherwise noted.
* * * * *
0
6. Section 229.308T is amended by revising the ``Note to Item 308T''
and paragraph (c) to read as follows:
Sec. 229.308T (Item 308T) Internal control over financial reporting.
Note to Item 308T: This is a special temporary section that
applies only to a registrant that is neither a ``large accelerated
filer'' nor an ``accelerated filer'' as those terms are defined in
Sec. 240.12b-2 of this chapter and only with respect to a fiscal
period ending on or after December 15, 2007, but before December 15,
2009.
* * * * *
(c) This temporary Item 308T, and accompanying note and
instructions, will expire on June 30, 2010.
PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934
0
7. The general authority citation for Part 249 is revised to read as
follows:
Authority: 15 U.S.C. 78a et seq. and 7201 et seq.; and 18 U.S.C.
1350, unless otherwise noted.
* * * * *
0
8. Form 20-F (referenced in Sec. 249.220f), Part II, Item 15T is
amended by:
0
a. Revising the date ``December 15, 2008'' in paragraph (2) to the
``Note to Item 15T'' to read ``December 15, 2009''; and
0
b. Revising the date ``June 30, 2009'' in paragraph (d) to read ``June
30, 2010''.
Note: The text of Form 20-F does not, and this amendment will
not, appear in the Code of Federal Regulations.
0
9. Form 40-F (referenced in Sec. 249.240f) is amended by:
0
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
0
b. Revising the date ``June 30, 2009'' in the paragraph following
``Instruction 3T'' to the ``Instructions to paragraphs (b), (c), (d)
and (e) of General Instruction B.(6)'' to read ``June 30, 2010''.
Note: The text of Form 40-F does not, and this amendment will
not, appear in the Code of Federal Regulations.
0
10. Form 10-Q (referenced in Sec. 249.308a) is amended by revising
Item 4T to Part I to read as follows:
Note: The text of Form 10-Q does not, and this amendment will
not, appear in the Code of Federal Regulations.
Form 10-Q
* * * * *
PART I--FINANCIAL INFORMATION
* * * * *
Item 4T. Controls and Procedures
(a) If the registrant is neither a large accelerated filer nor an
accelerated filer as those terms are defined in Sec. 240.12b-2 of this
chapter, furnish the
[[Page 38100]]
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.
(b) This temporary Item 4T will expire on June 30, 2010.
* * * * *
0
11. Form 10-QSB (referenced in Sec. 249.308b) is amended by revising
Item 3A(T) to Part I to read as follows:
Note: The text of Form 10-QSB does not, and this amendment will
not, appear in the Code of Federal Regulations.
Form 10-QSB
* * * * *
PART I--FINANCIAL INFORMATION
* * * * *
Item 3A(T). Controls and Procedures
(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.
(b) This temporary Item 3A(T) will expire on October 31, 2008.
* * * * *
0
12. Form 10-K (referenced in Sec. 249.310) is amended by:
0
a. Revising the date ``December 15, 2008'' in paragraph (a) to Item
9A(T) to Part II to read ``December 15, 2009''; and
0
b. Revising the date ``June 30, 2009'' in paragraph (b) to Item 9A(T)
to Part II to read ``June 30, 2010''.
Note: The text of Form 10-K does not, and this amendment will
not, appear in the Code of Federal Regulations.
0
13. Form 10-KSB (referenced in Sec. 249.310b) is amended by revising
the dates ``December 15, 2008'' in paragraph (a), and ``June 30, 2009''
in paragraph (b) to Item 8A(T) to Part II to read ``March 15, 2009''.
Note: The text of Form 10-KSB does not, and this amendment will
not, appear in the Code of Federal Regulations.
By the Commission.
Dated: June 26, 2008.
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-14942 Filed 7-1-08; 8:45 am]
BILLING CODE 8010-01-P
