Securities and Exchange Commission: Internal Control Over Financial Reporting in Exchange Act Periodic Reports of Non-Accelerated Fliers
GAO-10-177R, Oct 30, 2009
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GAO reviewed Securities and Exchange Commission's (SEC) new rule on internal control over financial reporting in Exchange Act periodic reports of non-accelerated filers. GAO found that (1) The final rule amends temporary rules1 which extended compliance dates under the Sarbanes-Oxley Act of 2002. The final rule postpones for an additional six months the date by which a non-accelerated filer must begin to include an auditor's attestation report on ICFR with its annual report; and the (2) the Commission complied with the applicable requirements.
Securities and Exchange Commission: Internal Control Over Financial Reporting in Exchange Act Periodic Reports of Non-Accelerated Filers, GAO-10-177R, October 30, 2009
The Honorable ChristopherJ. Dodd
Chairman
The Honorable Richard C. Shelby
Ranking Minority Member
Committee on Banking, Housing, and Urban Affairs
United States Senate
The Honorable BarneyFrank
Chairman
The Honorable Spencer Bachus
Ranking Minority Member
Committee on Financial Services
House of Representatives
Subject: Securities and Exchange Commission: Internal Control Over FinancialReporting in Exchange Act Periodic Reports of Non-Accelerated Filers
Pursuant to section801(a)(2)(A) of title 5, United States Code, this is our report on a major rulepromulgated by the Securities and Exchange Commission (Commission), entitled InternalControl Over Financial Reporting in Exchange Act Periodic Reports ofNon-Accelerated Filers (RIN: 3235-AK48).We received the rule on October 14, 2009. It was published in the Federal Register as a final rule on October19, 2009, with aneffective date of December 18, 2009. 74Fed. Reg. 53,628.
The finalrule amends temporary rules[1]which extended compliancedates under the Sarbanes-Oxley Act of 2002. Under section 404(b) of the Act, companiesthat are non-accelerated filers[2]are required to include in their annual reports an attestation report of theirindependent auditor on internal control over financial reporting (ICFR) forfiscal years ending on or after December 15, 2009. Thefinal rule postpones for an additional six months the date by which anon-accelerated filer must begin to include an auditors attestation report onICFR with its annual report. On October2, 2009, the Commission madepublic a staff studythat assessed whether the newmanagement guidance and a new auditing standard are having the intended effectof facilitating more cost-effective ICFR evaluations and audits for smallerreporting companies. In light of the proximity in time of thepublication of the staff study and the end of the year, and concerns that asignificant number of smaller public companies may not have prepared to complywith Section 404(b) pending completion of the staff study, the final rule willextend the compliance date for filing attestation reports with an annual reportto the date on which a non-accelerated filer will have to file an annual reportfor a fiscal year ending on or after June 15, 2010.
Theobligation of non-accelerated filers to comply with Section 404(b) has beendeferred a number of times to more than five years after the date on whichcompliance was required of accelerated filers.TheCommission notes that all steps necessary to implement the requirements ofSection 404 of the Sarbanes-Oxley Act have been completed. The Commission does not expect to furtherdefer the obligations of non-accelerated filers to comply with Section 404(b).
Enclosed is our assessment of the Commissions compliancewith the procedural steps required by section 801(a)(1)(B)(i) through (iv) oftitle 5 with respect to the rule. Ourreview of the procedural steps taken indicates that the Commission compliedwith the applicable requirements.
If you have any questions about this report or wish tocontact GAO officials responsible for the evaluation work relating to thesubject matter of the rule, please contact Shirley A. Jones, Assistant GeneralCounsel, at (202) 512-8156.
signed
Robert J. Cramer
Managing Associate General Counsel
Enclosure
cc: ElizabethMurphy
Secretary, Securities and
Exchange Commission
ENCLOSURE
REPORT UNDER 5 U.S.C. sect.801(a)(2)(A) ON A MAJORRULE
ISSUED BY THE
SECURITIES AND EXCHANGE COMMISSION
ENTITLED
"INTERNAL CONTROL OVER FINANCIAL REPORTING
IN EXCHANGE ACT PERIODIC REPORTS OF
NON-ACCELERATED FILERS"
(RIN: 3235-AK48)
(i) Cost-benefit analysis
The Commission states the benefits of thisrule are that non-accelerated filers will be required to complete only managementsassessment of compliance with the Section 404 requirements during the deferralperiod. The final rule also allowsnon-accelerated filers more time to better prepare for compliance with theSection 404(b) requirements and for the Section 404(b) audit to be properlyplanned, scoped and executed. TheCommission states the cost of this rule is that investors in non-acceleratedfilers will have to wait longer than they would in the absence of the deferralfor the assurances provided by the auditors attestation report and the addedinvestor confidence that could result from obtaining an independent Section404(b) attestation.
(ii) Agency actions relevant to the RegulatoryFlexibility Act, 5 U.S.C. sections603-605, 607, and 609
The Commission did not provide a Final RegulatoryFlexibility Analysis because it relied on the good faith exception under Section553(b)(3)(B) of the Administrative Procedure Act to forego notice and comment.
(iii) Agency actions relevant to sections 202-205 ofthe Unfunded Mandates Reform Act of 1995, 2 U.S.C. sections1532-1535
Asan independent regulatory agency, the Commission is not subject to title II ofthe Unfunded Mandates Reform Act of 1995.
(iv) Other relevant information or requirements underacts and executive orders
Administrative Procedure Act, 5 U.S.C. sections551 etseq.
Onthe basis of the timing constraints discussed earlier and the limited nature ofthe extension, the Commission states that it found good cause under 5 U.S.C.sect. 553 to forego the normal notice and comment procedures regarding the finalrule because they are impracticable, unnecessary or contrary to the publicinterest, and the extension is necessary or appropriate in the public interestand consistent with the protection of investors.
Paperwork Reduction Act, 44 U.S.C. sections3501-3520
Inconnection with the Commissions earlier proposal and adoption of the rules andamendments implementing the Section 404 requirements, the Commission submitted costand burden estimates of the collection of information requirements to theOffice of Management and Budget (OMB) and published a notice requesting commenton the collection of information requirements in the proposing release forthose rule amendments. The Commission receivedapproval for these new collection of information requirements. Because the Commission does not believe that the final rule willresult in any change in the collection of information requirements and itpreviously received no comments on the burdens associated with theserequirements, the Commission did not revise its Paperwork Reduction Act burden and cost estimates submitted toOMB.
Statutory authorization for the rule
The Commissionstates that the final rule is made under the authority set forth in Section 19of 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.
Executive Order No. 12,866 (Regulatory Planning andReview)
Asan independent regulatory agency, the Commission is not subject to the reviewrequirements of the order.
Executive Order No. 13,132 (Federalism)
Asan independent regulatory agency, the Commission is not subject to the reviewrequirements of the order.
[1] See,e.g., Rule 2-02T of Regulation S-X (17 C.F.R. sect. 210.2-02T).
[2]The Commission statesthat although the term non-accelerated filer is not defined in its rules,it is used to refer to an Exchange Act reporting company that does not meet theRule 12b2 [17 CFR 140.12b2] definition of either an accelerated filer ora large accelerated filer.