The Securities and Exchange Commission is extending the deadline for smaller companies to comply with one of the key provisions of the Sarbanes-Oxley Act. As recently as last week, SEC officials had
expressed concern that smaller companies might not be able to meet the internal controls deadline and had said they might push the deadline back for them. "The commission is sensitive to resource constraints at accounting firms and at smaller public companies, and is taking this step to facilitate the successful and effective implementation of the ... requirements," Don Nicolaisen, the agency's chief accountant, said in a statement. SEC representatives did not immediately return a call seeking comment. The provision has to do with assessing a company's internal controls -- essentially a system of checks and balances over financial reporting designed to prevent corporate fraud. A classic example of an internal control would be a corporate rule that barred the person in charge of approving expense reports from being the person in charge of cutting the checks. The Sarbanes-Oxley Act requires companies to internally assess their controls and mandates that their auditors also scrutinize those controls. Both a company and its auditor are required to report on the state of the company's controls in the company's annual report, which is typically due 75 days after the end of the company's fiscal year. The deadline for complying with the provision kicked in earlier this month, meaning that companies now have to comply with the provision as their fiscal years end. But the SEC has now granted some extra time for smaller companies to complete their reports. Companies with a public float of less than $700 million will now have an additional 45 days to put their reports together, according to the agency. All told then, such companies will have 120 days after the end of their fiscal years to file their internal controls reports.
The SEC is requiring companies that take advantage of this delay to notify shareholders in their annual reports. Meanwhile, if such companies have already discovered material weaknesses in their controls, they are required to disclose them in their annual reports, instead of waiting until they submit their internal controls assessments. Many corporate watchdogs have praised the internal controls provision as one of the most important reforms of recent years. But a growing number of business leaders has
complained about the costs of complying with the rule. Indeed, some business interests have targeted the provision as one of the key areas they'd like to see modified as part of an overall update to the Sarbanes-Oxley Act.