We covered the foundation and theory behind the Auditing Standard 5 which tells us HOW to comply with SOX 404.  Now, we discuss the SOX 404 requirements and the impact of the JOBS Act on public companies and newly public companies.  In this session, we answer the following questions:

  1. What are the compliance requirements for SOX section 404?
  2. What is the impact of the JOBS Act on SOX 404 compliance?
  3. What are the criteria to qualify for Emerging Growth Company?
  4. What are the exemptions for Emerging Growth Company?
Requirements for SOX 404 Jobs Act
Fig. 1 – Sarbanes Oxley 404 requirement and Jobs Act

I suggest you watch the video. It’s easier to understand if you are a visual/audio learner. The content below is the same as the video. It’s for those who learn by reading.

 

What are the compliance requirements for SOX Section 404?

Section 404 requires companies to:

  • Annually document and assess the effectiveness of internal controls over financial reporting (called 404a), and
  • External auditors to opine on the company’s internal controls (called 404b). Material weaknesses in internal controls have to be disclosed in the registration statement and future SEC reports

This can be a big effort for growth companies because of your changing processes and procedures to accommodate growth.  Don’t underestimate this effort because your accounting staff already has a full plate running the business. Start preparing 12 months before filing your S-1 or registration statement.

Also, consider the implementation costs which can range from $150k to $250k depending on your business, and should be reflected in budgets and forecasts.
 

What is the impact of the JOBS Act on SOX 404 Compliance?

In 2012, Congress passed the Jumpstart Our Business Startups Act (the “JOBS Act”).

Intended to help reduce the burden that smaller companies face in raising money, the JOBS Act limits some of the regulatory requirements for SOX compliance. The most notable change is the creation of the “emerging growth company” (EGC), a new category of public company.

An EGC has less stringent regulatory and reporting requirements and is supposed to encourage public offerings by small and developing companies. Under the JOBS Act, EGCs are exempt from 404(b) for the first five years after going public.  Remember though that EGCs still need to follow 404a and document and assess internal controls annually.

Non-EGCs or accelerated filers have to follow 404a and 404b in the first complete fiscal year following their IPO. Early compliance is important to ensure the accuracy of the IPO offering document, because implementation of internal control procedures may reveal material information and affect reporting compliance post-IPO.
 

What are the criteria to qualify for Emerging Growth Company?

Title I of the JOBS Act outlines the requirements for EGC status under the SEC’s reporting framework.

For a company to be considered an EGC, its total gross revenues cannot exceed $1 billion in its most recently completed fiscal year.

EGC status can be held for up to a maximum of five years after an IPO if:

  1. The EGC’s total gross revenues do not exceed $1 billion during the five-year period,
  2. The EGC’s market capitalization does not exceed $700 million (i.e., the EGC does not meet the definition of a large accelerated filer), or
  3. The EGC does not issue more than $1 billion in nonconvertible debt in a three-year period.

 

What are the exemptions for Emerging Growth Company?

Parts of the JOBS Act that would apply to EGCs include:

  1. Require only two years of audited financial statements in an initial public offering (IPO) and other registration statements
  2. Exempt EGCs from SOX Section 404(b) which is the requirement to get an attestation report from its external auditors on the company’s Internal Control over Financial Reporting (ICFR)
  3. Exempt EGCs from any future PCAOB rules that may require auditor rotations
  4. Exempt EGCs from potential rules calling for expansion of the auditor’s report to include an auditor’s discussion and analysis of the company
  5. Other PCAOB rules that are adopted after the JOBS Act would apply to EGCs only if the SEC determined that the rules were designed to promote investor protection

 
Summary
To recap, today we learned about:

  1. What are the compliance requirements for SOX section 404?
  2. What is the impact of the JOBS Act on SOX 404 compliance?
  3. What are the criteria to qualify for Emerging Growth Company?
  4. What are the exemptions for Emerging Growth Company?

 
watch video in youtube

 

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