The SEC has rejected the recommendation by the SEC’s Advisory Committee on Smaller Public Companies to exempt smaller public companies from compliance with the internal controls provisions of section 404.

Section 404 requires management to report on the effectiveness of internal controls on financial reporting. Outside auditors must give an opinion on the effectiveness of these controls.

The date for compliance, July 2007, will be extended for a short period of time, but the SEC did not set a new date.

The PCAOB, which enforces the SEC rules, said it will review Auditing Standard No. 2 to mandate a concentration on areas of “high risk of fraud or material error.”

The SEC will offer new guidance to management and auditors on the assessment of internal controls.

While this development would not alleviate all the burdens on small companies, it would mean less reduction of work for CPAs. However, two bills introduced in the House by Rep. Tom Feeney (Rep—Florida) and Jim DeMint (Rep—South Carolina) would provide exemptions from Section 404 internal control requirements.

These bills are similar to the recommendations of the SEC Advisory Committee. Public companies with less that $700 million in capital (market value) with revenues not in excess of $125 million could “opt out of Section 404 while still complying with standard internal control guidelines that better fit their size and risk to investors.”

From Accounting Office Management & Administration Report, July 2006, p..1. For subscription information contact Institute of Management & Administration, Inc., 3 Park Avenue, 30th Floor, New York, NY 10016-5902. One-year subscription $349. 212-244-0360, [email protected]. For the complete article, click here .