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 The Securities and Exchange Commission has announced a series of actions it intends to take to improve the implementation of the Section 404 internal control requirements of the Sarbanes-Oxley Act of 2002.
The actions include:
Providing more guidance for companies
The SEC has received many requests for additional guidance for management on how to complete its assessment of internal control over financial reporting, as required by Section 404(a) of the Sarbanes-Oxley Act. To prepare for the issuance of management guidance, the Commission intends to take the following steps:
- Concept Release and opportunity for public comment.
The Commission expects to issue a Concept Release covering a variety of issues that might be the subject of Commission guidance for management. With the Concept Release, the Commission will solicit views on the management assessment process to ensure that the guidance the Commission ultimately proposes addresses the needs and concerns of all public companies. The SEC will also seek input on the appropriate role of outside auditors in connection with the management assessment required by Section 404(a) of Sarbanes-Oxley, and on the manner in which outside auditors provide the attestation required by Section 404(b), to assist in the SEC’s consideration of possible alternatives to the current approach.
- Consideration of additional guidance from COSO.
The SEC has long been supportive of the Committee of Sponsoring Organizations of the Treadway Commission (COSO) as it works to provide guidance on COSO's 1992 Internal Control - Integrated Framework to address the needs of smaller companies. The SEC anticipates that this forthcoming guidance will help organizations of all sizes to better understand and apply the control framework as it relates to internal control over financial reporting. As the SEC develops guidance for management on how to assess its internal control over financial reporting, it will consider the extent to which the additional guidance that COSO provides is useful to smaller public companies in completing their Section 404(a) assessments.
- Issuance of guidance.
Commentary submitted to the SEC has suggested that management assessments under Section 404 have not fully reflected the top-down, risk-based approach the Commission intended. Building from the information gathered in response to the Concept Release, and from the anticipated COSO guidance, the Commission currently anticipates that it will issue guidance to management to assist in its performance of a top-down, risk-based assessment of internal control over financial reporting. To ensure that this guidance is of help to non-accelerated filers and smaller public companies, the Commission intends that this future guidance will be scalable and responsive to their individual circumstances. The guidance will also be sensitive to the fact that many companies have already invested substantial resources to establish and document programs and procedures to perform their assessments over the last few years. The form of the guidance has yet to be determined.
Revisions to Auditing Standard No. 2
The PCAOB intends to propose revisions to its Auditing Standard No. 2, An Audit of Internal Control Over Financial Reporting Performed in Conjunction with an Audit of Financial Statements. Any final revision of AS No. 2 would be subject to SEC approval. The proposed revisions would:
- Seek to ensure that auditors focus during integrated audits on areas that pose higher risk of fraud or material error;
- Incorporate key concepts contained in the guidance issued by the PCAOB on May 16, 2005; and
- Revisit and clarify what, if any, role the auditor should play in evaluating the company's process of assessing internal control effectiveness.
The Commission will work closely with the PCAOB to ensure that the proposed revisions to AS No. 2 are in the public interest and consistent with the protection of investors.
SEC oversight of PCAOB Inspection Program.
The PCAOB announced on May 1st, 2006, that it would focus its 2006 inspections on whether auditors have achieved cost-saving efficiencies in the audits they have performed under AS No. 2, and on whether auditors have followed the guidance that the PCAOB issued in May and November 2005 urging them to do so. As part of the Commission's oversight of the PCAOB, the Commission staff inspects aspects of the PCAOB's operations, including its inspection program. Among other things, upon completion of the PCAOB's 2006 inspections, the staff will examine whether the PCAOB inspections of audit firms have been effective in encouraging implementation of the principles outlined in the PCAOB's May 1, 2006, statement.
Extension of Compliance for Non-Accelerated Filers
In order to permit non-accelerated filers and their auditors to have the benefit of the management guidance that the SEC intends to issue, and to have the opportunity to evaluate and implement the revisions that the PCAOB plans to make to AS No. 2, the Commission expects to issue a short postponement of the effective date of the Commission's rules implementing Section 404 for non-accelerated filers. It is anticipated that any such postponement would nonetheless require all filers to comply with the management assessment required by Section 404(a) of Sarbanes-Oxley for fiscal years beginning on or after Dec. 16, 2006.
•Date: 23rd May 2006• Region: US • Type: Article •Topic: Power management
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