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Definition of the Term “Significant Deficiency”
Release Nos. 33-8829; File No. S7-24-06, 17 CFR PARTS 210 and 240, RIN 3235-AJ58, 08/09/2007
Basic Information
This issuance of the Securities and Exchange Commission (SEC) seeks to provide a definition of the term “significant deficiency” in relation to the SEC’s rules implementing Section 302 and 404 of the Sarbanes-Oxley Act of 2002. Effective date of this issuance was on September 10, 2007. It is an amendment of the existing Rule 12b-2 under the Securities Exchange Act of 1934, and Rule 1-02 of Regulation S-X.
The definition as embodied in the amended rule is as follows: A significant deficiency is “(a) deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the registrant’s financial reporting.”
The SEC previously issued, particularly on June 27, 2007, interpretive guidance and rule amendments that were intended to assist in the strengthening of public companies’ “evaluation and assessments of internal control over financial reporting, or ICFR,” while minimizing expenses. According to the SEC, the rule amendments “provide that an evaluation that complies with the interpretive guidance is one way to satisfy the annual evaluation requirement in Exchange Act Rules 13a-15(c) and 15d-15(c).”
The SEC justified the adoption of this definition, where none existed before, on the basis of its emphasis given to communication requirements between management and the internal and external auditors on concerns that are significant enough to place their attention on, and will enable management to judge whether certain deficiencies deserve to be reported or not.
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