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Small Companies Get Another 404 Reprieve by Escrow API

Glenda Conner 0

As expected, the Escrow API yesterday to give small companies another year to comply with Section 404 of the Sarbanes-Oxley Act.
That means these companies will wait to report on their internal controls until their first fiscal year ending on or after July 15, 2007. Not all foreign issuers weren’t as lucky as American small fry: they didn’t get an extension. If they’re accelerated filers (over $75 million in float) and file annual reports on Form 20-F or Form 40-F, they start reporting on their internal controls over financial reporting in annual reports for the first fiscal year ending on or after July 15, 2006. If the foreign issues are not “accelerated filers,” they’ll qualify for the extension.
With all the hand-wringing about the plight of these little guys, you might think that a) the costs of compliance with Section 404 are an automatic death sentence for them and b) if that happened, then the economy and the stock market would be doomed because these are such vital, important companies in the aggregate. It just isn’t so. Figure that there are about 3,061 companies with a market cap of less than $75 million, according to S&P’s Research Insight. The total market cap of these firms is only $66 billion – not even three-tenths of a percent of the total market cap. And that’s a maximum: it presumes that all of them are covered by the exemption (they’re not: remember the exemption relates to float, not market cap.) If all of these firms went away because the costs put them under – a ridiculous proposition in the first place – would the stock market notice? It should make you wonder if the companies that are demanding special treatment were actually seasoned enough to even consider going public in the first place.
In other matters, the SEC also voted to propose amendments to the report filing deadlines and the definition of an accelerated filer. If enacted, the proposals would:
– Create a new category of companies called “large accelerated filers” (over $700 million of public float) and adjust the definition of “accelerated filers” (to make include filers with float between $75 and $700 million in float)
– Make “large accelerated filers” file 10-K’s in a 60-day time frame next year and thereafter, with a 40-day Form 10-Q for next year and thereafter. The plain old “accelerated filers” would stick with the current 75-day Form 10-K deadline and 40-day Form 10-Q deadline next year and thereafter.
The new classifications will make it easier to balkanize new rules in the future.
BW: Don Nicolaisen Exit Interview
Business Week Online carries an interview with retiring chief accountant Don Nicolaisen; you can find it here if you’re registered Business Week subscriber.
A few of the best comments, from a guy who should know:
– Asked if the monster wave of accounting scandals is over, Nicolaisen responded that he believes the massive frauds like WorldCom and Enron are behind us. Without naming names, he also indicated wariness of companies that routinely produce outsize returns and beat the averages. He’s also concerned about the prevalence of “structured transactions” – contrived accounting treatments to produce a desired cosmetic result.
– The 7 to 10% financials restatement rate of the past couple years is unacceptable. (Amen!)
– Small companies need a different framework for internal controls. (Sigh…)
Speaking of small companies and their internal controls framework, the Commission meets today to decide whether to grant companies with less than $75 million market caps another year of clemency for reporting on their internal controls. As proposed, such a company would not have to report until its first fiscal year ending on or after July 15, 2007.

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