SOX 404(b) is Officially Dead for Small Business Filers!

Good news for small public companies, SOX 404(b) is dead! On July 21, 2010, the exemption from SOX 404(b), for public companies with less than $75 million in market capitalization was signed into law by President Obama. Since SOX was introduced in 2002, small public companies have experienced delays in the effective date of SOX 404(b), which requires auditors to attest to the design and operating effectiveness of internal controls. Each year we watched as the deadline for compliance extended for another year. When the House approved a version of its bill earlier this year, which included provisions to reverse 404(b) compliance for smaller reporting companies, we wrote our US Senators Boxer and Feinstein to support such provision to remove compliance with 404(b) for smaller reporting companies. Our position was contrary to our audit and accounting industry, its professionals and partners, as well as its powerful associations. Our position was contrary for various reasons, none of which took any consideration of the lost opportunity fees our industry would have enjoyed had 404(b) for smaller reporting companies not been repealed.

But don’t get too excited, SOX 404(a) is still in effect for all public companies. SOX 404(a) requires management to conduct a review of internal controls over financial reporting and document your processes and findings.

Here is a brief description of what you should consider based on your company size.

Management of public company with less than $75 million in market capitalization: Continue to conduct internal review of controls, as you will need to conclude on the effectiveness of those controls in 10-K’s and 10-Q’s. Be aware of future growth of your company and its stock price through organic growth or M&A activity, and consider the fact that you may have to be compliant with SOX 404(b) at some point. If a material weakness is discovered by the auditor the company will still be required to report the deficiency in its quarterly and/or annual reports and their remediation plan for such.

Management of Public company with over $75 million in market capitalization: Stay tuned to additional changes as studies are being conducted to determine the benefit of SOX 404(b) to companies with market caps between $75 and $250 million. Such studies could result in companies with higher market caps also being exempt.

Private companies looking to go public through mergers, acquisitions, or reverse mergers: Consider what your market capitalization may be based on your IPO, reverse acquisition, etc. If you are planning on selling your company to a public company or taking it public, know that private companies with strong internal control framework are usually more valuable than those without it.

All Companies: As part of an audit, an auditor is REQUIRED to conduct a walkthrough of your internal controls to assess where risks may be and to identify potential weaknesses in controls. If deficiencies are detected they are REQUIRED to inform you. Use this information to strengthen your company.

Don’t hesitate to give dbbmckennon a call or email today, to ask us about how SOX 404(a) and the exemption to 404(b) impacts your company, especially if you are considering a reverse merger, acquisition, or other entity altering transaction. We would be happy to help answer your questions or assist you in compliance in order to put your company on a path to success.