On May 23, the Securities and Exchange Commission unanimously approved interpretive guidance to help public companies strengthen their internal control over financial reporting while reducing unnecessary costs, particularly at smaller companies. The new guidance will focus company management on the internal controls that best protect against the risk of a material financial misstatement. SEC Chairman Christopher Cox stated that the new guidance will enable “companies of all sizes ... to scale and tailor their evaluation procedures according to the facts and circumstances. And investors will benefit from reduced compliance costs.” John W. White, Director of the SEC’s Division of Corporation Finance added that the “interpretive guidance should reduce uncertainty about what constitutes a reasonable approach to management’s evaluation while maintaining flexibility for companies that have already developed their own assessment procedures and tools that serve the company and its investors well.”

The SEC also approved rule amendments providing that a company that performs an evaluation of internal control in accordance with the interpretive guidance satisfies the annual evaluation required by Rules 13a-15 and 15d-15 of Securities Exchange Act of 1934. The SEC also amended its rules to define the term “material weakness” as “a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis.” The SEC also voted to revise the requirements regarding the auditor’s attestation report on the effectiveness of internal control over financial reporting to more clearly convey that the auditor is not evaluating management’s evaluation process but is opining directly on internal control over financial reporting.

The effective date of the interpretive guidance and adopted rules will be 30 days from their publication in the Federal Register. The full text of the interpretive guidance and rules will be posted to the SEC website as soon as possible.