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Remember when the millennium bug was all over the news? Companies struggled and sweated and spent big bucks to get their computer systems in order before New Year’s Eve 1999. Seems like 1999 all over again when you read today’s Sarbanes-Oxley �404 stories. Public companies are now required to assess their internal controls and have the reports certified by their auditors — and many may miss their deadlines. Recently, dozens of companies each month began disclosing some inadequacies in controls. On Nov. 30, the Securities and Exchange Commission, responding to concerns about missed deadlines and control problems, granted a 45-day reprieve for a certain group of companies. These companies now have a little extra time to comply. If you’re like half of Americans, you’re an investor. The Sarbanes-Oxley Act of 2002 was Congress’s reaction to the recent corporate fraud stories — Enron, WorldCom and the others. The act’s requirements are intended to protect investors from unreliable financial reporting through new requirements for company boards, audit committees and even their watchdogs, the auditors. Section 404 of the act, known as SOX 404, requires companies to assess and report on the effectiveness of their internal financial controls, and it requires their auditors to audit the findings. Does this protect investors? It should. Without the proper controls, companies are in danger, and so is your investment. The right controls help guard against everything from employee theft to management misstatement of financial information. Investors should also care because there’s no telling what an unsatisfactory report will do to a company’s stock price. Big institutional investors may react by selling companies that fail to meet the standards. And that could very well affect the value of stocks you hold individually, in your mutual funds or in your 401(k) plans. Smaller companies get until 2005 to comply. But many have no idea what lies ahead. I’ve spoken to some chief financial officers who plan to “think about it next year” — not realizing that the process could take a year to complete. SOX 404 has substantially increased the amount of work audit firms must do, and many firms have more work than current staff can handle. Consequently, many public companies are starting to see audit fees rise even before beginning the process, or worse, their auditors resigning. You should also care if you’re an employee at a public company. Complying with SOX 404 is no walk in the park. There are two parts: management’s assessment and the independent auditor’s opinion. Both take time and cost money — more than most anyone expected. In many cases management doesn’t have the expertise or the manpower to do the assessment, so they hire consultants (often other audit firms, since their own auditors are prohibited). The SEC originally estimated that it would cost a company about $95,000 to comply. Recent reports put the average cost of compliance in the millions. For a small company, that could mean re-allocation of resources to the effort, or a decision to withdraw from the public markets. Public companies are classified as accelerated filers and nonaccelerated filers. Accelerated filers have “public float” (the value of outstanding stock not held by insiders) of more than $75 million at the end of the second quarter of the previous fiscal year. Nonaccelerated filers have less than $75 million in public float at that same point. For most accelerated filers with December year-ends, compliance begins Friday, with the report on controls due with the annual report. A group of accelerated filers with public float between $75 million and $700 million must also comply by Friday, but these companies have been granted an additional 45 days to file the report on controls. Nonaccelerated filers with December year-ends must comply beginning Dec. 31, 2005. Is SOX 404 another Y2K? We saw few dramatic issues on Jan. 1, 2000 — likely due to the attention paid before the New Year’s ball dropped. The realities of Sarbanes-Oxley implementation are just beginning to become apparent. Pay attention. This will affect investors, management and the average American. Patrick F. Gannon is an audit partner at Kaufman Rossin& Co., based in Miami. This article was originally published inMiami Daily Business Review , aRecorder affiliate. • Practice Center articles inform readers on developments in substantive law, practice issues or law firm management. Contact News Editor Candice McFarland with submissions or questions at [email protected]or go to www.therecorder.com/submissions.html.

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