Perhaps you’ve heard that the Reform Act was passed this summer which granted a permanent exemption from the audit attestation requirements of SOX 404(b) to the non-accelerated filers, which are those public companies with a market capitalization under $75 million. I know those companies affected are breathing a sigh of relief, but let’s look at what this really means.
Non-accelerated filers must measure their market capitalization on the last business day of the end of their second fiscal quarter. If the market cap is below $75M, they are considered non-accelerated filers and therefore not subject to the SOX 404(b) requirements, which require a company’s external auditor provide an opinion on the design and effectiveness of internal controls. If your company is hovering near the $75M mark mid-year then planning for an internal controls audit is wise.
However, non-accelerated filers have been complying with SOX 404(a) for many years, which requires management’s assessment of internal controls, and they must continue to provide this assessment. For many smaller companies this assessment was a rudimentary review of controls accompanied by a memo, at best. But the requirements for 404(a) clearly state that a company must document its control structure and test the effectiveness of those controls. In the past, the SEC has not commented on the thoroughness of management’s assessment based on the understanding that eventually an audit of the control structure would occur. However now, with the exemption passed, it is likely that a non-accelerated filer will receive some evaluation from the SEC on the completeness of this work.
In other words, a simple internal control memo may not be enough for the non-accelerated company.