United States: SEC Proposes To Delay Auditor’s Attestation Requirement

The U.S. Securities and Exchange Commission (the "SEC") has proposed to delay the requirement for non-accelerated filers¹ to include an attestation report of the independent auditor in their annual reports. Under the current internal control over financial reporting (the "ICFR") requirements, a non-accelerated filer must provide an auditor's attestation in its annual report filed for fiscal years ending on or after December 15, 2008. If the extension is adopted, such companies will be required to begin filing their auditor attestation reports for fiscal years ending on or after December 15, 2009.

When the original internal control rules were first enacted in 2003, the SEC required each company subject to the reporting requirements of the Securities and Exchange Act of 1934 (the "Exchange Act") to include in its annual report on Form 10-K, 20-F or 40-F (as applicable), an internal control report by management and a related auditor's attestation regarding the adequacy of its internal controls. Since that decision, multiple postponements have occurred in implementation for non-accelerated filers (both domestic companies and foreign private issuers²).

The management's report and auditor's attestation covers:

Management Report ·

• Statement of management's responsibility for establishing and maintaining adequate internal control over financial reporting; ·

• Statement identifying the framework used by management to evaluate the effectiveness of the company's internal control over financial reporting; ·

• Management's assessment of the effectiveness of the company's internal control over financial reporting as of the end of the company's most recent fiscal year, including a statement as to whether the company's internal control over financial reporting is effective; and ·

• Disclosure of any "material weaknesses" identified by management in the company's internal control over financial reporting (if any material weaknesses in the company's internal control over financial reporting have been identified, management may not conclude that internal control over financial reporting is effective).

Auditor's Attestation ·

• Statement that the registered public accounting firm that audited the financial statements included in the company's annual report has issued an attestation report on management's assessment; and ·

• File the accounting firm's attestation report on internal control over financial reporting as part of the annual report.³

Under the original compliance dates, a non-accelerated filer was required to comply with the ICFR requirements for annual reports filed for fiscal years ending on or after April 15, 2005.⁴ Since then, recognizing the substantial time and resources that a non-accelerated filer may endure in implementing the ICFR requirements and in order to provide companies and their respective auditors with adequate time to adopt the necessary controls and implement new guidance and standards, the SEC extended the compliance dates for non-accelerated filers (which includes foreign private issuers that are nonaccelerated filers) through a series of postponements.⁵

On February 1, 2008, in the most recent proposal to delay implementation, the SEC proposed to extend, by one year, the date by which a non-accelerated filer must begin to comply with the auditor's attestation report requirement by amending Item 308T of Regulation S-K, Rule 2-02 of Regulation S-X and Forms 10-Q, 10-K, 20-F and 40-F.6 While a non-accelerated filer will still be required to file a management's report in its annual report for its first fiscal year ending on or after December 15, 2007, the proposal, if adopted, would defer the auditor's attestation report requirement until the company files an annual report for its first fiscal year ending on or after December 15, 2009 from December 15, 2008.⁷ The SEC wants to allow non-accelerated filers to benefit from the implementation of certain new standards and guidance without undue cost. For example, on June 20, 2007, the SEC approved interpretive guidance and adopted amendments to rules that would assist management in measuring the effectiveness of a company's ICFR.⁸ Further, on July 25, 2007, the SEC approved Auditing Standard No. 5 issued by the Public Company Accounting Oversight Board (the "PCAOB") to further implement the ICFR requirements and replace Auditing Standard No. 2. The new standards provide additional guidance for independent auditors to attest and report on management's assessment of the company's ICFR. On October 17, 2007, the PCAOB also issued preliminary guidance on how auditors can apply Auditing Standard No. 5. Moreover, the SEC has implemented a study to evaluate whether the auditor attestation requirement is carried out in a manner that is cost-effective for smaller reporting companies.

Under the proposed extension, non-accelerated filers will benefit from complying with the ICFR requirements by only filing a management's assessment for the next two years.

The SEC is soliciting comments until March 10, 2008.

Annex A

Footnotes

^{1 A Company is a non-accelerated filer if it does not meet the requirements of either an "accelerated filer" or a "large accelerated filer" as defined in Rule 12b-2 of the Exchange Act. Pursuant Rule 12b-2, a company becomes an accelerated filer upon meeting the following conditions as of the end of its fiscal year: (i) market value of voting and non-voting common equity is greater than $75 million but less than $700 million (as of the last business day of the company's most recently completed second fiscal quarter), (ii) the company has been subject to the reporting requirements of the Exchange Act for at least 12 months, (iii) the company has filed at least one annual report pursuant to the Exchange Act and (iv) the company is not eligible to use Forms 10-KSB and 10-QSB. A company is deemed a "large accelerated filer" when the market value of the voting and non-voting common equity is $700 million or more and it meets requirements (ii) through (iv) laid out above for an "accelerated filer."}

^{2 Recently, in September 2007, the SEC updated the Frequently Asked Questions on Management's Report on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports. Questions 12 through 15 were added to address issues faced by foreign private issuers in complying with the ICFR in light of the varying accounting principles such as International Financial Reporting Standards or home country generally accepted accounting principles.}

^{3 See Item 308 of Regulation S-K, Item 15 of Form 20-F and Instruction 3 of General Instruction B(6) of Form 40-F.}

^{4 Management's Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, SEC Release No. 33-8238 (June 5, 2003), available at http://www.sec.gov/rules/final/33-8238.htm.}

^{5 For a more detailed chronology of the extensions, see Annex A. Foreign private issuers that are accelerated filers were required to comply with the ICFR requirements beginning for their first fiscal years ending on or after July 15, 2006.}

^{6 Internal Control Over Financial Reporting in Exchange Act Periodic Reports of Non-Accelerated Filers, SEC Release No. 33-8889 (February 1, 2008), available at http://www.sec.gov/rules/proposed/2008/33-8889.pdf .}

^{7 The SEC provides a transition period for a newly public company or a company subject to the Exchange Act reporting requirements for the first time. Such companies become subject to the ICFR requirements upon filing their second annual report. However, the company must include a statement in its first annual report to the effect that it is not required to include a management report or auditor's attestation report due to the transition period established by the SEC rules.}

^{8 Commission Guidance Regarding Management's Report on Internal Control Over Financial Reporting Under Section 13(a) or 15(d) of the Securities Exchange Act of 1934, SEC Release No. 33-8810 (June 20, 2007), available at http://www.sec.gov/rules/interp/2007/33-8810.pdf. This interpretive release "sets forth an approach by which management can conduct a top-down, risk-based evaluation of internal control over financial reporting." Although management is not required to follow the interpretive guidance, following the procedures provided in the guidance ensures that the evaluation is one way to satisfy the SEC's rules.}

^{9 The SEC distinguished accelerated foreign private issuers and non-accelerated foreign private issuers}

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