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SEC Likely To Delay Review for Small Firms

Companies Required To Audit Strength of Financial Controls

By Carrie Johnson
Washington Post Staff Writer
Saturday, November 27, 2004; Page E01

The Securities and Exchange Commission is preparing to grant small companies a 45-day delay to finish complying with rules requiring them to attest to the strength of their financial safeguards, according to four sources with knowledge of the plan.

SEC officials, including the chief accountant and commissioners from both political parties, recently signaled in public statements that they are willing to give more time to smaller companies struggling to review their financial controls.


The Sarbanes-Oxley Act does not list in detail the kinds of financial controls that companies must review to comply with the law. But some of the thousands of processes companies are scrutinizing include:

• Making sure that large corporate checks include the signatures of more than one employee or executive.

• Developing and following a plan for reviewing employee expense accounts.

• Ensuring that key financial data is backed up routinely on computer systems.

• Limiting access to certain computerized financial systems to a small number of employees to prevent fraud and abuse.

• Sharing responsibility for accounts receivable and other important functions among several employees so that no one person has exclusive control of checks and purchase orders.

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Under the current rule, companies with a market capitalization of more than $75 million would have had to finish reviews on rolling deadlines that began Nov. 15. The delay, which is expected to be announced early next week, would increase the size of companies that would get a short break from the present deadlines to $700 million, the sources said. Under the current rule, companies with a market capitalization of less than $75 million and foreign companies have until July to begin complying. Sources familiar with the proposed action said they had not calculated how many of the 4,000 companies with early deadlines might benefit from the delay.

The move is designed to aid smaller companies that lack sophisticated in-house accounting help and have had trouble lining up outside auditors to finish the time-consuming reviews, which are intended to prevent fraud and financial errors that can hurt investors.

The SEC's five members were being polled individually on the delay. Not all the commissioners had voted as of yesterday afternoon, but the proposal is unlikely to meet with strong opposition, said sources who spoke on condition of anonymity because the process is not yet complete.

Accounting firms and regulators have warned that hundreds of companies may not complete the work on time and that others may be forced to disclose weaknesses in their controls, which involve such safeguards as multiple signatures on corporate checks and scrutiny of employee expense accounts. More than 60 companies signaled in public filings last month that they had discovered problems, according to the Compliance Week newsletter. The chief executive of PricewaterhouseCoopers LLP, the nation's biggest accounting firm, recently said that 20 percent of its clients might fail to complete their reviews on time.

The Public Company Accounting Oversight Board, which inspects the work of accountants who audit publicly traded companies, announced yesterday that it would meet Tuesday to vote on undisclosed internal control review issues. The board has issued rules for auditors who are responsible for scrutinizing their clients' financial-reporting controls.

Earlier this week the accounting board issued extra guidance to auditors on how to interpret their duties. Chief Auditor Douglas R. Carmichael said Monday in a written statement that some auditors and companies "have been interpreting the standard as being more prescriptive and demanding more work than was intended."

The reviews, imposed under the 2002 Sarbanes-Oxley Act, are among the most controversial and expensive reforms of the past few years. Companies are spending an average of $5.1 million to comply, according to a recent survey by recruiting firm Korn/Ferry International. Experts predict that the costs, which have reached as much as $30 million for giants such as General Electric Co., will lessen as companies and auditors gain more experience in how to perform the work.

Trade groups have complained for months that the requirements are too onerous. But SEC officials and corporate governance experts say the benefits of the reviews will ultimately outweigh their short-term costs.

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