Experts are urging small community banks to keep Section 404 of the Sarbanes-Oxley Act on their front burners even though the Securities and Exchange Commission has given them another year to comply with its provisions.
Much of the banking industry's discontent with Sarbanes-Oxley centers on Section 404, which requires banks to document and test all internal controls and then have the auditors attest to their findings.
Donna Fisher, the director of tax and accounting for the American Bankers Association, said the testing would entail step-by-step examinations of selected in-house transactions, including expense vouchers and loan disbursements, to ensure that they were in accord with the written guidelines.
"We're telling banks to get started ASAP," Ms. Fisher said Thursday. Banks that wait too long to address the Section 404 requirements might not be able to repair flaws in time to satisfy their auditors. That could lead to an adverse opinion on the annual audit, which could seriously damage a bank's reputation, she said.
Atlanta-based Powell Goldstein LLP also has advised its banking clients to get started on Section 404 compliance right away.
All SEC-registered companies are subject to Sarbanes-Oxley, passed in 2002, but the agency has divided them into two categories, accelerated and nonaccelerated filers.
The SEC has extended the compliance deadline for the nonaccelerated filers - those with public floats of $75 million or less - once already, to July 15, 2005. On Wednesday it pushed the date back another 12 months. Now the internal-control audits mandated by Section 404 will be required as part of all fiscal yearend audits conducted after July 15, 2006.
The deadline for the accelerated filers is April 30.
Ms. Fisher said that Section 404 is causing bankers much anxiety because the Public Company Accounting Oversight Board's interpretation of the legislation is so strict that auditors will be forced to place thousands of transactions under a microscope. (The oversight board regulates auditors.)
"You can hear a sigh of relief from banks all across the country," Ms. Fisher said of the deadline extension.
J. Bruce Whittaker, the president and chief executive officer of the $287 million-asset Greene County Bancorp Inc. in Catskill, N.Y., said he was relieved to have more time, but he added that his company plans to proceed as if the deadline had not been changed.
"We've already hired another person to assist our chief financial officer because of the extra workload" resulting from Section 404, he said. "We're going to plod our way through pretty much as originally scheduled, but it's nice to know we have extra time to cure whatever deficiencies we might uncover."
He added quickly that he did not anticipate finding any serious deficiencies in the bank's operation.
"We've never had any significant problems and I intend to keep it that way now that we have to adhere to a higher standard," Mr. Whittaker said.
Bank trade groups have urged the Public Company Accounting Oversight Board to modify its interpretation of Section 404, but Ms. Fisher said auditors appear determined to follow a strict line.
"There's a fear among auditors," Ms. Fisher said. "They saw what happened to Arthur Andersen and that scared them to death."
She added that compliance costs have surged at small SEC-registered banks as they prepare for the implementation of Section 404.
"What we're hearing from even the tiniest banks is that this is costing them the same as companies 10 times their size," she said.
