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HOW CAN WE COMPLY WITH §404
WITHOUT GOING BROKE IN THE PROCESS?
For many micro-cap companies, it is highly probable that their existing internal controls over financial reporting will contain material weaknesses in all components of COSO, in every process at the transaction level, and in the IT system. Additionally, the financial and human resources available to the management teams of most micro-cap companies are very limited and, therefore, management’s ability to remediate material weaknesses is constrained, at best.
If this is similar to your situation, you need to consider the relative costs and benefits of establishing controls to eliminate your material weaknesses. The question that you and many other CEOs and CFOs may face as you consider complying with §404 is:
“Do we risk going out of business or live with our material weaknesses?”
Although it is preferable to have a clean internal control assessment, you may have no other practical option than to disclose material weaknesses in your annual report as part of your annual assessment of internal controls. The law requires you to perform an assessment; it does not require you to remediate material weaknesses! Call us today to find out if this strategy is appropriate for your company.
ICCS Strategy for Microcaps
If the above scenario applies to your company, then ICCS partners has developed a unique strategy to ensure your company complies with the provisions of §404 , but doesn’t go broke in the process. Although we like our clients to have clean internal control assessments, the management teams of many micro-cap companies may have no option other than to live with disclosing material weaknesses in their annual reports as part of their annual assessments of internal controls.
For most, micro-cap companies having to comply with §404, the strategy advocated by ICCS is as follows:
- Scope the transaction-level processes to be evaluated under the assessment.
- Document and assess the design effectiveness of the “as-is” internal controls over financial reporting at the entity-, transaction-, and IT-levels using control objective/control activities matrices only. Identify “control gaps.”
- Evaluate control exceptions — individually and in aggregate.
- Management performs a preliminary high-level cost-benefit analysis on the remediation effort required to eliminate the Company’s material weaknesses.
- Assuming material weaknesses are rampant throughout the financial reporting process and the costs associated to remediate have been determined by management to be prohibitive, then formally conclude on management’s assessment and draft Item 9A for inclusion in Form 10-K.
The above strategy significantly reduces the effort required to comply with §404, yet ensures management does adequately perform an assessment of its internal controls and provides the groundwork to facilitate the outside auditor’s attestation of management’s assessment in the second year of complience. Note: If management determines that some components of COSO, or processes at the transaction-level, or the IT system do not contain material weaknesses, then management’s assessment of the internal controls will need to be expanded to include testing of the operating effectiveness of the key controls in those areas.
Services Offered by ICCS Partners
ICCS will assist management in performing steps 1, 2, 3, & 5 as outlined above. ICCS has the tools and hands-on experience necessary to efficiently implement the above strategy.
The SEC Offers Relief - But Not a Repreive
On December 15, 2006, the SEC granted relief to smaller public companies (non-accelerated filers) by extending the date by which non-accelerated filers must start providing a report by management assessing the effectiveness of their company’s internal control over financial reporting. Non-accelerated filers must now provide management’s assessment in their annual reports for fiscal years ending on or after December 15, 2007.
The Commission also extended the date by which nonaccelerated filers must begin to comply with the Section 404(b) requirement to provide an auditor’s attestation report on internal control over financial reporting in their annual reports. This compliance date is now the first annual report for a fiscal year ending on or after Dec. 15, 2008. Companies that only provide management’s report during their first year of compliance in accordance with this new rule must state in the annual report that the report does not include the auditor’s attestation report and the company’s registered public accounting firm has not attested to management’s report on the company’s internal control over financial reporting.
The extension is intended to enable management of smaller public companies to focus on the internal assessment process during the first year of compliance with the internal control reporting provisions.
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