Here are a few key items you need to know about SOX 404B compliance. Read below to find out who it applies to and how to do it.
- What is SOX 404B compliance?
- Who must be SOX 404B compliant?
- What are the criteria for Accelerated Filers?
- Do Emerging Growth Companies have to comply with SOX 404B?
- When do Emerging Growth Companies become Accelerated Filers?
- When do Accelerated Filers have to comply with SOX 404B?
- Immediately after an IPO, what must an Accelerated Filer do to be SOX 404B compliant?
- What does SOX 404B require in the first full year of an Accelerated Filer public company?
- When are SOX 404B controls tested?
- What happens if a control fails during the walk-through for SOX 404B?
- What is the recommended SOX 404B timeline for de-SPAC first time accelerated filers?
What is SOX 404B compliance?
Simply stated, SOX 404B requires that your external auditors verify by testing, inspecting, or observing that you have internal controls over your accounting activities (SOX). Once a year you must show an external party that you have checks and balances in place to monitor your business activities and financial reporting.
SOX 404B is the phase after SOX 404A. In a nutshell, SOX 404A requires you to have checks and balances in place to monitor your business activities and financial reporting, but there are no external auditors that independently test your internal controls over financial accounting and reporting.
Who must be SOX 404B compliant?
Large Accelerated Filers, Accelerated Filers, and Emerging Growth Companies (EGC) that have transitioned into accelerated filer status.
What are the criteria for Accelerated Filers?
An Accelerated Filer is a public company that meets any of these conditions:
- minimum public float of $75 million
- annual revenues of $100 million or more
Do Emerging Growth Companies have to comply with SOX 404B?
EGCs are exempt from 404B for the first five years or when they hit these thresholds;
- have $1 billion in public debt
- have $1 billion in revenue
- have market cap of $700 million or more (measured 6 months into their fiscal year)
Remember though that EGCs still need to document and assess internal controls over accounting annually to comply with SOX 404A.
When do Emerging Growth Companies become Accelerated Filers?
Emerging Growth Companies generally transition into Accelerated Filer status:
- after five years, or
- on the last day of the fiscal year in which their total annual gross revenues are $1.07 billion or more
- have $1 billion in public debt
- have market cap of $700 million or more when measured 6 months into their fiscal year
When do Accelerated Filers have to comply with SOX 404B?
Companies that are at Accelerated Filer status when they go public must comply with SOX 404B for the first complete fiscal year following the IPO (after their first 10K). 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.
Immediately after an IPO, what must an Accelerated Filer do to be SOX 404B compliant?
What does SOX 404B require in the first full year of an Accelerated Filer public company?
This is a list of the main SOX activities that each public company must follow along its journey from pre-IPO company, to Emerging Growth Company (404A), to an Accelerated Filer (404B).
When are SOX 404B controls tested?
This is a sample timeline of a full-year cycle of verifying that controls are operating effectively.
What happens if a control fails durWhat happens if a control fails during the walk-through for SOX 404B?
Typically for a December 31 year-end, you begin planning in March or April, create your documentation in May, and then in June you conduct a walk-through to test the design of the control for the risk you are wanting to mitigate or reduce. If this walk-through fails, you need to stop and fix the control design immediately.
As you figure out what is causing the problem, consider whether you are a) using the right reports, b) if your level of documentation is enough, c) if it is related to personnel level d) if there is a skills gap, or e) if you are gathering the right information.
Do a second walk-through after you have fixed the issue. If it is successful, then wait a period of time before proceeding to test the control so you can be sure the controls have had some time to work. Let's say you fixed a transaction control in July – you would wait to test at the end of September, and again at the end of December.
What is the recommended SOX 404B timeline for a de-SPAC first time accelerated filers?
Early April: Q1 close
End of April to early May: Interview and assess current processes
2nd week of May: Analyze control gaps
3rd week of May: Make recommendations
End of May: Document controls
June: Conduct walk-throughs
July: Q2 close; implement changes for quarter-end controls (e.g. account reconciliations, reserve analysis)
August to early September: Test activity from Jan 1 to Jun 30
Mid-September to mid-October: Implement changes, especially for quarter-end controls
October: Q3 close
November to early December: Test activity from Jul 1 to Sep 30
December to mid-January: Implement changes, especially for quarter-end controls
January: Year-end close
February: Testing - round 3 - test controls that happen once a year, e.g. 10K disclosures