Applying Section 404 to Small Companies

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May 9

Applying Section 404 to Small Companies

Linda Chan

Know More: Sarbanes-Oxley 2.0, Sarbanes-Oxley

CFO.com reported on April 25, 2006 in an article entitled "Cox: 'My Goal Is to Make 404 Work'" by Tim Reason, that one of Securities and Exchange Commission (SEC) Chairman Christopher Cox’s goals was to make Section 404 of the Sarbanes-Oxley Act of 2002 (Section 404) work for small companies, and not exempt them from compliance.

Section 404 requires public companies to include in annual reports, an internal control report which shall (1) state the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting; and (2) contain an assessment, as of the end of the most recent fiscal year of the issuer, of the effectiveness of the internal control structure and procedures of the issuer for financial reporting.

In addition, Section 404 requires each registered public accounting firm that prepares or issues the audit report for the issuer to attest to and report on the assessment made by the management of the issuer.
The documentation required for Section 404 compliance has proved expensive in terms of engaging outside consultants and auditors, hiring additional employees, testing of internal procedures, and then remedying material weaknesses. It appears that smaller companies lack the resources available to larger companies. Financial Executives International has summarized and submitted to the SEC some of the views of small companies on Section 404 compliance.

related entries

Sarbanes-Oxley Act of 2002 Compliance Nov 2, 2006
Sarbanes-Oxley Section 404: Risks and Opportunities Oct 23, 2006
Sarbanes-Oxley Section 404 Oct 30, 2006
Sarbanes-Oxley Inapplicable to Employee Complaints Oct 14, 2006
SFAS No. 86 Oct 13, 2006

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