What the JOBS Act Means for SOX Compliance

Posted by Bill Bockwoldt on April 5, 2012
describe the imageThe jobs act created a new category of issuer, called an "Emerging Growth" (ECG) company, in the interest of stimulating equity investment in companies by modifying the regulations surrounding registration, capital-raising activities, and compliance requirements. To qualify for this category, a company must have produced less than 1 billion of revenue in it's prior fiscal year (and must not have sold common equity in a registered offering prior to December 8, 2011). A qualifying company would lose ECG status when one of the following occurs:
  • Five years elapse from the IPO date
  • Company produces more than 1 billion in gross revenue
  • Company issues more than 1 billion in non-convertible debt within a 3-year period
  • Company reaches accelerated-filer status (>$700MM public market float)
As an ECG, a company would be exempt from an external audit of their internal controls over financial reporting (SOX 404(b)) as long as they maintain ECG status. This would be a maximum of 5 years from the IPO date if no other conditions specified above are met before that time.

This does not exempt any existing public companies from SOX 404(a) reporting requirements (management attestation). Management attestation is essentially self-reporting by Company Management on the implementation and effectiveness of their internal controls over financial reporting. These attestations are provided in the quarterly and annual filings of public companies.

In addition, existing public companies who do not qualify for ECG status are still subject to 404(b) requirements (external audits) once they exceed non-accelerated filer status (>$75MM in public float). This means that the JOBS Act has no impact on the requirement for existing public companies to meet existing requirements.

A high-level background on the Sarbanes-Oxley requirements include:
  • 404(a) – Management attestation (self-reporting) 
    • As of June, 2010 the percentage of adverse Management-Only Assessments (404a) filed was about 10X higher than the rate experienced by companies required to file Auditor Attestations (404b) 1 Number of first-time 404 filers receiving an adverse opinion in 2009 was 28.9%2 (includes management self-reporting) 
  • 404(b) – External audit of internal controls over financial reporting Management support & commitment can be challenging Little or no compliance expertise internally Employee training may be required for process execution At the very least, re-training is often involved 
  • 404(c) - Non-accelerated filers granted a permanent reprieve for 404(b) Management is still responsible for 404(a) reporting – this includes documenting controls and attesting to their effectiveness

For a more comprehensive summary of the JOBS Act and how it affects private companies planning to IPO, click here.

If you would like more information on how to implement best-practice internal controls in a cost-effective and efficient manner or rationalize your existing system of internal control, please contact us to discuss your needs.

Tags: Internal Controls, Pre-IPO, 404, SOX, internal control