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SOX 404 and the Small Company: Planning for Compliance
Section 404 of the Sarbanes-Oxley Act of 2002 deals with the development and testing of internal controls. For small companies, this is a particularly challenging requirement. Lacking the resources and engineered business processes of larger businesses, small caps will find themselves actually having to define business processes while building controls for their finance operations. Further, contrary to the assumptions of the PCAOB, control complexity and depth does not scale with the size of the business. The result is that small caps face greater challenges than their larger counterparts. Through effective planning and the lessons of small subsidiaries of big companies, though, small companies can navigate the Section 404 maze. This article is vital to complying with Section 404. The Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley) consists of many provisions that require extensive business and cultural change. But, Section 404 has become synonymous with the Act. Section 404 details the requirements associated with internal control frameworks, specifically the assessment of internal required by a publicly traded company’s management team. Accounting controls are not a new concept; they certainly did not originate with Sarbanes-Oxley. Sarbanes-Oxley, though, does codify the role of the independent audit firm in assessing and reporting on the effectiveness of the company’s internal controls. Internal controls must meet the stringent standards of a company’s external auditors in order for the company to be considered in compliance with Section 404 of the Act. The explicit assessment and attestation of controls mandated by Section 404 are important, but the requirements implicit in Section 404 represent the primary reason why publicly traded companies fret over compliance. Containing fewer than twenty lines, Section 404 doesn’t say much. The broad language shifts the burden to companies and auditors, meaning that companies need to prepare themselves for any anticipated or unanticipated compliance situation. The goal of Sarbanes-Oxley is to prevent the results of both fraud and uncertainty. While the mitigation of risks is possible, the returns in protecting against uncertainty are diminished. The broad language in Sarbanes-Oxley requires broad remediation steps (i.e. broad controls). Without precedent, the impact of Sarbanes-Oxley was difficult to forecast. The implications for publicly traded companies was clear – the cost of doing business was about to increase significantly. Given the likelihood of high cost, the Public Company Accounting Oversight Board (PCAOB) granted small publicly traded companies (equity market capitalization between $75 million and $200 million) a one-year reprieve – the purpose of which was to allow small companies to learn from the experiences of larger companies. These bigger businesses, which arguably have more resources at their disposal to invest in compliance, would ostensibly reduce the cost of compliance for small companies. Since compliance needs do not scale based on headcount, revenue, or bottom line, small companies need to scrounge for lessons from which to learn. Want to know more? Download the White Paper "SOX 404 and the Small Company: Planning for Compliance" for just $49.95. |
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