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Sarbanes-Oxley

Comprehensive legal guidance on Sarbanes-Oxley Act (SOX) compliance for public companies. Anthony, Linder & Cacomanolis provides expert analysis of Section 404(a) and 404(b) requirements, CEO/CFO certifications, and filer tier definitions.

Sarbanes-Oxley Act (SOX) Compliance: Internal Controls and Executive Accountability

The Sarbanes-Oxley Act of 2002 (SOX) represents one of the most significant shifts in federal securities law, establishing rigorous standards for corporate governance, financial disclosure, and internal controls. For public companies and those navigating the transition to the public markets, SOX compliance is a critical operational mandate. Anthony, Linder & Cacomanolis provides sophisticated counsel to boards and management teams to facilitate the implementation of institutional-grade internal controls over financial reporting (ICFR) and ensure the accuracy of executive certifications.

Executive Certification Requirements: Sections 302 and 906

At the heart of SOX is the mandate for individual executive accountability. The Act requires the Chief Executive Officer (CEO) and Chief Financial Officer (CFO) to personally certify the integrity of the company’s periodic reports.

Section 302: Corporate Responsibility for Financial Reports

Pursuant to Section 302 and Exchange Act Rules 13a-14 and 15d-14, the CEO and CFO must provide a signed certification in every Annual Report (Form 10-K or 20-F) and Quarterly Report (Form 10-Q). This certification affirms that the signing officers have reviewed the report and that, based on their knowledge, the report does not contain any material misstatements or omissions. Furthermore, they must certify their responsibility for establishing and maintaining “disclosure controls and procedures” and that they have evaluated the effectiveness of these controls within 90 days prior to the filing.

Section 906: Corporate Responsibility for Financial Reports

Section 906, codified at 18 U.S.C. § 1350, imposes criminal penalties for non-compliance. This certification accompanies the Section 302 filing and states that the periodic report fully complies with the requirements of the Exchange Act and that the information contained therein fairly presents, in all material respects, the financial condition and results of operations of the issuer.

Internal Controls Over Financial Reporting: Section 404

Section 404 of SOX focuses on the adequacy of a company’s internal controls over financial reporting. Compliance is divided into two distinct requirements: management’s assessment and the independent auditor’s attestation.

Section 404(a): Management Assessment of Internal Controls

Section 404(a) is a mandatory requirement for all public companies, including non-accelerated filers and foreign private issuers. Under this section, the company’s annual report must contain an “internal control report” that:

  • States the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting.
  • Contains an assessment, as of the end of the most recent fiscal year, of the effectiveness of the internal control structure and procedures for financial reporting.

Management must use a recognized framework, such as the COSO (Committee of Sponsoring Organizations of the Treadway Commission) framework, to conduct this evaluation.

Section 404(b): Auditor Attestation of Internal Controls

Section 404(b) requires a registered public accounting firm to attest to, and report on, management’s assessment of the effectiveness of internal controls. While Section 404(a) focuses on management’s internal view, Section 404(b) provides an external, independent verification. Due to the significant costs associated with this audit, federal law provides exemptions for Smaller Reporting Companies (SRCs) and Emerging Growth Companies (EGCs).

Filer Definitions and 404(b) Eligibility: Rule 12b-2 Standards

The requirement to comply with Section 404(b) is determined by a company’s filer status, which is defined by a rigorous set of criteria found in Exchange Act Rule 12b-2. Classification is primarily based on “public float”—the aggregate market value of voting and non-voting common equity held by non-affiliates—measured as of the last business day of the issuer’s most recently completed second fiscal quarter.

Large Accelerated Filers

Pursuant to Rule 12b-2, an issuer is classified as a large accelerated filer if it meets the following four conditions as of the end of its fiscal year:

  • The issuer had an aggregate worldwide market value of voting and non-voting common equity held by its non-affiliates (public float) of $700 million or more, as of the last business day of its most recently completed second fiscal quarter.
  • The issuer has been subject to the requirements of Section 13(a) or 15(d) of the Exchange Act for a period of at least 12 calendar months.
  • The issuer has filed at least one annual report pursuant to Section 13(a) or 15(d) of the Exchange Act.
  • The issuer is not eligible to use the smaller reporting company provisions for its annual and quarterly reports.

Accelerated Filers

An issuer is classified as an accelerated filer if it meets the following conditions under Rule 12b-2:

  • The issuer had a public float of at least $75 million, but less than $700 million, as of the last business day of its most recently completed second fiscal quarter.
  • The issuer has been subject to the requirements of Section 13(a) or 15(d) of the Exchange Act for a period of at least 12 calendar months.
  • The issuer has filed at least one annual report.
  • The issuer is not a smaller reporting company that is eligible to use the smaller reporting company provisions and that had annual revenues of less than $100 million in the most recent fiscal year for which audited financial statements are available.

Non-Accelerated Filers

Issuers that do not meet the public float or reporting history thresholds of accelerated or large accelerated filers are classified as non-accelerated filers. This primarily includes companies with a public float below $75 million. Importantly, under the SEC’s 2020 amendments to Rule 12b-2, companies that qualify as smaller reporting companies with less than $100 million in annual revenue are excluded from the accelerated filer definition and are thus exempt from the Section 404(b) auditor attestation requirement.

Emerging Growth Companies (EGCs)

Pursuant to the Jumpstart Our Business Startups (JOBS) Act, an Emerging Growth Company (EGC) is defined as an issuer that had total annual gross revenues of less than $1.235 billion during its most recently completed fiscal year. An issuer remains an EGC until the earliest of the following milestones:

  • The last day of the fiscal year following the fifth anniversary of its initial public offering.
  • The last day of the fiscal year in which the issuer’s total annual gross revenues reach or exceed $1.235 billion.
  • The date on which the issuer has issued more than $1 billion in non-convertible debt during the previous three-year period.
  • The date on which the issuer is deemed to be a large accelerated filer.

EGCs are exempt from the auditor attestation requirements of Section 404(b) for as long as they maintain their EGC status, provided they do not otherwise qualify as a large accelerated filer.

Strategic Compliance Counsel

The transition from a non-accelerated filer to an accelerated filer triggers significant new compliance costs and disclosure burdens. Anthony, Linder & Cacomanolis assists companies in monitoring their filer status and preparing the internal governance architecture necessary to meet the rigorous standards of Section 404(b) before the requirement becomes effective. We also advise on the disclosure of “material weaknesses” and “significant deficiencies” to ensure that management’s certifications remain accurate and defensible.

Authority Through Technical Depth

Our expertise in SOX compliance and the nuances of SEC reporting tiers is documented through years of professional analysis. We invite executive leadership to explore our extensive library of insights at our corporate website and our specialized blog site, www.securitieslawblog.com, for detailed discussions on the evolution of ICFR standards and executive liability.

Schedule an Executive Strategy Consultation

Navigating the complexities of SOX requires an authoritative partner who understands the intersection of corporate governance and federal securities law. Anthony, Linder & Cacomanolis invites you to engage in a high-level strategy consultation to evaluate your current compliance framework.

Schedule an executive strategy consultation with our senior partners to discuss your SOX compliance needs by calling 877-541-3263 or visiting our contact page.