The Securities and Exchange Commission took a small step last week toward relaxing the Sarbanes-Oxley Act's most onerous provision, but community bankers were expecting something more.
For months bankers have been holding out hope that the SEC's board would vote to extend a deadline for small companies to comply with the internal-control rules of Section 404 of the 2002 law. At a meeting last week, commissioners voted instead to direct SEC staff members to work with staff from the Public Company Accounting Oversight Board to make sure the two organizations are consistent in applying the act's rules, and that the rules are efficient and cost-effective.
Donna Fisher, the director of tax and accounting for the American Bankers Association, said that small, publicly traded banking companies should be pleased that the SEC and the accounting board "are working together and seem to have the right attitude toward streamlining Section 404."
Still, she said, the meeting was ultimately a letdown to community bankers.
"There was enormous disappointment that there wasn't a delay for the nonaccelerated filers," she said. "That's what we're hearing from the bankers."
Sharon Haeger, the regulatory counsel for America's Community Bankers, expressed similar disappointment. "I was really anticipating that the SEC would grant a further extension for nonaccelerated filers. There is so much work to finalize the auditing standards and finalizing the guidance," she said.
Section 404 states that public companies must document their internal controls over financial reporting and have outside auditors test them. Small companies - including many community banks - have complained repeatedly that complying with the provision would be time-consuming and expensive, and they have urged the SEC to relax some of the requirements.
The initial deadline for small companies to comply with the provision had been April 2005. However, in response to their concerns, the SEC has granted them several extensions. Many now have until December meet the Section 404 requirements.
Chris Cole, the regulatory counsel for the Independent Community Bankers of America, said small companies pressing for another extension have allies in Congress; last month both the Senate and House Small Business Committees sent letters to he SEC and the accounting board, asking that the deadline for many small companies be extended to at least the due date of their 2008 annual reports. (Read copies of the
Mr. Cole urged bankers to send letters to members of Congress and the SEC. "At this point I think we need to keep up the pressure as much as we can," Mr. Cole said.
David Bochnowski, chairman and chief executive officer at the $619 million-asset Northwest Indiana Bancorp in Munster, Ind., said that the Section 404 requirements should be relaxed for banks and thrifts, which, under the Federal Deposit Insurance Corp. Improvement Act of 1991, are already required to document internal controls.
"The optimum position for bankers is to have the rules stand in place of 404, or at least be taken into account," said Mr. Bochnowski.
But Mr. Cole said that the odds for receiving an exemption are long, and that if the SEC granted one for a single regulated industry, then other regulated industries, such as insurance, energy, and health care, would push for exemptions of their own.
The accounting board is drafting audit standards, which the SEC must approve. It expects the new standards to be submitted for SEC review by the end of May or early June.
At last week's meeting, the SEC board voted to support four staff recommendations to work with the accounting board on remaining unresolved issues in the proposed standards.
First, the SEC will work to better align its proposed new management guidance with the accounting board's new auditing standards.
Second, it will work on scaling the 404 audits to take into account the size and individual circumstances of companies.
Third, it will encourage auditors to use their professional judgment when testing management's assessment of financial statements.
Finally, the SEC will develop a principles-based approach to determining when and how much auditors can rely on the work of others.
