Public Company Disclosure Controls and Procedures

Going Public Controls and Procedures

Securities Lawyer 101 Blog

To back up the officer and director certifications in periodic reports, issuers must establish and maintain a system of disclosure controls and procedures designed to ensure that the company records, processes, summarizes and discloses on a timely basis information required to be disclosed in 1934 Act filings.  Issuers must evaluate on a quarterly basis the effectiveness of their disclosure controls and procedures. The requirement that an issuer have disclosure controls and procedures  extends beyond financial matters and includes all controls and procedures relating to required SEC disclosures, including interactive data.

The SEC defines a material weakness in internal controls and procedures as a deficiency, or a combination of deficiencies, in internal control over financial reporting that creates a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis.

Section 404 and related SEC rules require that public companies include a management report on the effectiveness of the company’s internal control over financial reporting in their Annual Reports on Form 10-K.   If the issuer is an accelerated or large accelerated filer – a company with market capitalizations of more than $75 million-, it’s independent auditor  must provide a separate audit-like analysis, to attest to, and report on, management’s assessment.

Internal control over financial reporting includes policies and procedures that:

•Track transactions in assets and maintenance of records that detail accurately and fairly reflect the acquisitions and dispositions of the issuer’s assets.

•Control teceipts and expenditures to provide reasonable assurance that the issuer records the transactions as necessary to permit preparation of financial statements in accordance with GAAP requirements, and that receipts and expenditures are being made only in accordance with authorizations of the issuer’s officers and directors.

•Protect assets to provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer’s assets that could have a material effect on its financial statements.

The SEC does not specify the methods or procedures to be used by management when conducting its internal control evaluation, but has provided useful guidance that encourages documentation:

Develop and Test Procedures.

Management must base its assessment on procedures to evaluate the design of internal control over financial reporting. After which, management should “actively” test its operating effectiveness, going beyond simple inquiry.

Results of Assessment Procedures.

Management must base its assessment on evidence including documentation of the internal control design and on the process and results of testing.

Develop Documentation and Maintain Records.

Issuers should develop, and maintain in company records, documentation and other evidence that support management’s assessment.

Management’s Assessment.

Management must be actively involved in the process and cannot delegate its responsibility to assess internal control to the auditor. Auditors may provide advice and make recommendations for improvements to internal control, so long as management, and not the auditor, makes the accounting decisions. Someone other than the auditor such as management or a third-party provider must create the issuer’s control procedures.

If an issuer identifies a material weakness, it must disclose the existence of the material weakness in its report on Form 10-K. In such circumstances, management is prohibited from concluding that the issuer’s internal control over financial reporting were effective for the relevant period.

For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit   This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.

Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855