Internal Control Assessment Requirements

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A key factor in the detection and prevention of fraud is strong internal controls. Section 404(1) of the Sarbanes-Oxley Act (SOX) requires that public company’s management annually assesses the efficacy of internal controls over financial reporting. Section 404(b) of SOX requires independent auditors provide an attestation report on the assessment of internal controls by the company’s management (though some smaller companies are exempt). These policies both help the ensure internal controls remain strong.

Smaller entities

Smaller public companies told the SEC that the costs of complying with Sec. 404(b) would outweigh the benefits for investors. The SEC investigated ways to ease the burden of the rule, during which they postponed the compliance deadline for nonaccelerated filers (companies with a public float of less than $75 million on the last business day of their most recent fiscal quarter).

In 2010, the SEC permanently exempted nonaccelerated filers from SOX Sec. 404(b) under the Dodd-Frank Wall Street Reform and Consumer Protection Act. This exemption protected nonaccelerated filers from having to comply with Sec.404(b) beginning in June of 2010.

New definition

This year the SEC expanded “smaller reporting companies” to those with a public float with less than $250 million rather than $75 million. This change allows nearly 1,000 companies to use a lighter set of disclosure rules tailored to smaller reporting companies. However, this change did not apply to the distinction between a nonaccelerated and accelerated filer; the $75 million float threshold still applies for the Sec. 404(b) exemption.

Under the advisement of auditors and investment advocate groups, SEC chairman Jay Clayton opted to keep the current threshold for exemption of the Sec. 404(b) rule. This is despite SEC Commissioners Michael Piwowar and Hester Peirce favoring raising the accelerated filer threshold.

Factors other than the $75 million threshold can determine a company to be an accelerated filer, for example, if a company’s public float drops to $75 million they do not automatically adopt nonaccelerated status. Rather, the public float of a company would have to fall below $50 million to exit accelerated status.

Contact us

No matter your filing status, all public companies are responsible for assessing the effectiveness of internal controls under Sec. 404(a). We can answer questions you have about SOX rules or information about assessing your internal controls. Contact us at 818-334-8623 or click here, and we will contact you.


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