Major Improvements Seen in ICFR Due to Filer Status Change

In our recent report, SOX 404 Disclosures: A Seventeen-Year Review, we found that the percentage of companies with ineffective management assessments of internal controls over financial reporting (ICFR) were down across all company sizes for fiscal year 2020. The most significant decline came from accelerated filers, with nearly 100 fewer adverse controls assessments. As a result, the percentage of ineffective accelerated filer control assessments dropped by nearly 4%, from 12.8% to 9.1%.

This decline was due, in part, to the SEC’s change in the definition of an accelerated filer. This change became effective in March 2020. SOX 404 requires that companies have ICFR periodically assessed, with different requirements based on filer status and company size. Consequently, a change in filer status from accelerated to non-accelerated changes the required type of assessment.

Between 2019 and 2020, we found that 337 companies changed their status. These companies switched from accelerated filer to non-accelerated filer or to smaller reporting company. As an auditor attestation isn’t required for non-accelerated filers or smaller reporting companies, those companies ceased issuing an auditor attestation on controls from one year to the next. These companies accounted for a huge portion of the positive trend in control assessments for accelerated filers.

In 2019, in contrast to 2020, the SEC required these companies to issue an auditor’s attestation. As a result, in 2019, 19% of these companies disclosed ineffective internal controls. This was 6% higher than accelerated filers as a whole. These same companies represented 70% of the reduction in ineffective accelerated filer assessments in 2020.

These companies also improved the percentage of non-accelerated filers with ineffective controls in 2020. In addition to having a lower percentage of ineffective controls than companies that qualified as non-accelerated filers in 2019, the proportion of companies that became non-accelerated filers in 2020 saw a dramatic decline in ineffective controls, from 19% in 2019 to just 8% in 2020.

The percentage of non-accelerated filers that issued ineffective assessments improved by 6%, from 43.6% in 2019 to just 37.6% in 2020. But excluding companies that changed their filer status from accelerated to non-accelerated, 2020 resulted in just a 2% improvement to 41.3%.

Download the full report for more insights on trends in internal controls.

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