SEC Launches Survey of Section 404 Costs, Benefits
Dec. 17, 2008
FEI Summary

On Dec. 11, 2008 the U.S. Securities and Exchange Commission posted a link to its online survey of the costs and benefits of internal control reporting under Sarbanes-Oxley Section 404 and related rules of the SEC and Public Company Accounting Oversight Board. The survey is available here: http://www.sec.gov/spotlight/404survey.htm. The SEC is seeking responses by year-end.

The SEC had announced earlier this year (see SEC's June 20 press release) that it was delaying the implementation of the rules under Sarbanes-Oxley Section 404(b) requring an external audit of internal control for smaller public companies (nonaccelerated filers - generally, those with less than $75 million market cap) in part, to provide more time to conduct and analyze the results of this study and consider whether any further improvements to the rules are warranted.

In 2007, additional guidance for management to implement Sarbanes-Oxley Section 404(a), the management report on internal control, which has become effective for large and small companies, was issued by the SEC. Also in 2007, PCAOB issued Auditing Standard No. 5 (AS5), replacing AS2, for the auditor's integrated audit of the financial statements and internal control. 

The SEC's action to delay implementation of the external audit of internal control (not a delay of the audit of the financial statements, just the audit of internal control) was aimed at determining if further efficiencies can be made in the rules or the implementation therof, based on the experience of companies that have implemented the rules so far, since the cost to small companies of implemeting these rules has a disproportionate impact on their bottom line, raising concerns about competitiveness and, in some cases, the ability of such firms to remain public companies. (Letters were issued by the House and Senate Small Business Commitee chairs in previous years asking the SEC to further consider application of the rules to small companies for this reason.) Results of the survey could potentially lead to further changes in rules or the implementation thereof impacting large as well as small public companies.

John W. White, then-director of the SEC's Division of Corporation Finance, said on June 20: "Over the past few years, the Commission and PCAOB have committed extensive resources to improving the efficiency and cost-effectiveness of the implementation of Section 404's requirements, particularly for smaller companies. I am optimistic that this study of real-world data will help further inform our efforts to improve the implementation of SOX 404."

Additional facts in connection with the survey:

• All companies with experience in complying with the Section 404 rules are invited by the SEC to participate in the survey.  

• An online login ID and password is required to complete the survey, and various individuals at public companies were emailed login information by the SEC’s Office of Economic Analysis and by certain other organizations on behalf of the SEC (FEI did not send any of the emails). We understand recipients of the letters/emails have included financial executives and attorneys. 

• Only one survey response from any individual company is desired by the SEC.
• The login information provided to company respondents tracks to company names to facilitate statistical analysis of survey results by the SEC.
• The survey is completely voluntary.
• The SEC would like survey responses by Dec. 31.

Questions can be addressed to 404survey@sec.gov  or by calling the SEC at 1.877.737.5782 .

Prepared Dec. 17, 2008 by Edith Orenstein, Director, Technical Policy Analysis, Financial Executives International (FEI). This summary does not reflect FEI opinion unless specifically noted above.