PCAOB Extends Deadline for SOX Compliance

Written by: Katy Ragans

On October 2, 2009 the Securities and Exchange Commission (SEC) announced the deadline for smaller publicly traded companies (public companies with a float below $75 million) to be in full compliance with Section 404 of the Sarbanes-Oxley Act of 2002 (SOX) has been extended. The extension will come to an end beginning with annual reports of companies with a fiscal year end on or after June 15, 2010. Prior to the extension, the expiration date had been for fiscal years on or after December 15, 2009.

Section 404(a) requires the management of a company to report on the effectiveness of its internal controls over financial reporting. Section 404(b) requires that an independent auditor attest to management's review of its internal controls. These rules were first implemented in 2002 as part of SOX, but in 2007 a series of reforms were created in an effort to reduce the cost of compliance, without compromising its value. One of the reforms implemented in 2007 was Accounting Standard No. 5 (AS5), which was issued to provide guidance for smaller companies in the development of cost-effective internal controls and streamlining the audit process.

The extension was granted after the release of a study performed by the Office of Economic Analysis of the SEC. The study was conducted to analyze the costs and benefits associated with compliance with Section 404(a) and Section 404(b) of SOX, and whether the provisions implemented in 2007, including AS5, were effective in reducing costs. The companies studied were mostly larger companies, but the SEC hopes the publishing of the results will allow smaller companies to design a more effective and efficient plan to adhere to Section 404.

Because the study was published less than three months before the original deadline for compliance, the SEC felt that it was appropriate to extend the deadline to allow the management and auditors of smaller companies adequate time to review the report and develop a more informed and more comprehensive plan for compliance with Section 404. However, SEC Chairman, Mary L. Schapiro, said "Since there will be no further Commission extensions, it is important for all public companies and their auditors to act with deliberate speed to move toward full Section 404 compliance."

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