As we reported on May 2, 2007, the SEC has been analyzing Section 404 of the Sarbanes-Oxley Act and rules promulgated thereunder in connection with developing interpretive guidance to assist management in creating a process for evaluating internal controls over financial reporting. The SEC was particularly interested in providing guidance that would enable public companies of all sizes to tailor their internal control procedures appropriately, in an effort to reduce needless costs, especially for smaller companies.
Yesterday, the SEC approved such guidance, which provides a principles-based framework to help public companies strengthen internal control over financial reporting without needless costs. Smaller companies in particular should benefit from the scalability of the guidance.
The SEC also amended its rules to provide for the following:
- a company that complies with the interpretive guidance in evaluating its internal controls satisfies the annual evaluation required by Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934;
- a definition for the term “material weakness”;
- the elimination of the requirement that auditors attest to management’s evaluation process; and
- the requirement for an auditor’s single opinion on the effectiveness of internal control over financial reporting in its attestation report.
The guidance and rule amendments will be effective 30 days from their publication in the Federal Registrar.