Federal Securities Lawyer & Attorney : Porter Wright Law Firm : Securities Exchange Law : Serving Ohio, Washington DC, Florida

Yesterday the SEC extended the deadline by which non-accelerated filers must file auditor attestation reports on internal controls to December 15, 2009 for annual reports filed after that date.
The auditor attestation report is a requirement of Section 404(b) of Sarbanes-Oxley. It correlates with one of the key aspects of Sarbanes-Oxley: the requirement that management must publicly evaluate internal control over financial reporting (ICFR). The independent auditor is charged with evaluating management’s process for assessing ICFR and determining whether ICFR is effective. This requires an evaluation by the auditor that is both detailed and expensive.

It is widely agreed that ICFR compliance costs, specifically auditor fees, will be disproportionately higher for smaller reporting companies. However, there have been attempts to decrease some costs. Last year, the SEC and the Public Company Accounting Oversight Board (PCAOB) issued guidance on how to evaluate the effectiveness of ICFR for management and the independent auditor, respectively, which calls for a less complex review for smaller companies.

The SEC has postponed auditor attestation reports for smaller companies in part because it is waiting on final guidance from the PCAOB, including examples of how to approach specific issues that arise in audits of smaller companies. A second reason for the postponement is the SEC is waiting on results of a study designed to see whether the guidance from last year is actually allowing for more cost-effective ICFR evaluations.

In short, it seems the SEC expects that the auditor’s attestation of ICFR is going to be expensive – especially the first time it must be completed – and is taking steps to make sure effective guidance is in place to decrease the costs.

• Email This
• Print
• Comments
• Trackbacks

The SEC has recently updated its Guide to Broker-Dealer Registration regarding a variety of new topics, including:

• Regulation R, which addresses bank brokerage activity and when banks that engage in securities transactions must register as broker-dealers;
• A broker-dealer’s obligation to recommend only investment strategies that are suitable for their customers and for which the broker-dealer has an “adequate and reasonable basis” for the recommendation;
• Regulation ATS, which allows broker-dealers to operate automated trading platforms without registering as a national securities exchange or as an exempt exchange; and
• Broker-dealer privacy policies and practices.

The primary focus of the Guide continues to be determining broker-dealer status. The Securities and Exchange Commission (SEC) requires that brokers and dealers register with the SEC and a self-regulatory organization such as the Financial Industry Regulatory Authority. A broker is generally any entity engaging in transactions in securities for the account of others, whereas a dealer acts as a principal that buys and sells securities for its own account, through a broker or otherwise.

• Email This
• Print
• Comments
• Trackbacks

The SEC has released its 143-page proposed rule regarding data tagging of financial statements, including over 100 questions designed to prompt comments on or before August 1, 2008. Data tagging of financial statements using eXtensible Business Reporting Language (XBRL) is expected to dramatically simplify how analysts, investors, and others compare the financial statements of publicly-traded companies.

The release explains that just as HTML allows Web browsers to present a website’s embedded text in a predicable format, XBRL will allow software applications, such as databases, financial reporting systems, and spreadsheets, to recognize and process tagged financial information.

Software is used to apply data tags from a standard list (developed over the past several years) to specific information in a company’s financial statements. Where a needed data tag does not exist in the standard list due to flexible U.S. financial reporting standards, a company can create a company-specific tag called an extension.

Under the proposed rules, beginning with fiscal periods ending on or after December 15, 2008, large accelerated filers that use U.S. GAAP and have a public float above $5 billion must provide their financial statements and applicable schedules as a new exhibit (to registration statements and annual reports) in interactive data format. Other large accelerated filers and smaller reporting companies must follow suit for fiscal periods ending on or after December 15, 2009 and 2010, respectively.

Regarding liability, the release distinguishes between liability for “interactive data” – data that is read by a computer – and liability for “human-readable interactive data” – data that is read by a human via a viewer that the SEC provides. Interactive data will be deemed furnished and not filed for purposes of Sections 11 and 12 of the Securities Act and Section 18 of the Exchange Act. Human-readable interactive data will be deemed furnished or filed under these sections depending on the usual liability provisions for the corresponding data that is currently filed in a traditional format. For example, a Form 10-K’s human-readable interactive data is deemed “filed” and subject to Section 18 of the Exchange Act, “consistent with the liability applicable to the corresponding part of the traditional format Form 10-K.” (See page 62 of the release).

This explanation appears to be a somewhat confusing way of saying that inaccurate financial data that is read by a machine will have little liability, but interactive data that can be read by a human will have the same liability that applies to current financial information.

Look for data tags to someday stretch into the realm of executive compensation and beyond. The proposed rule solicits comments on whether it would be useful to require interactive data for executive compensation disclosures, the MD&A, and other financial, statistical, or narrative disclosures.

• Email This
• Print
• Comments
• Trackbacks