Regulators taking open approach to 404 changes.

• Author: Orenstein, Edith
• Position: WashingtonINSIGHTS - Sarbanes-Oxley Section 404

Companies would love management reporting under Sarbanes-Oxley Section 404 to be easier. This month, the Securities and Exchange Commission (SEC) will attempt to make it more efficient and effective. Proposed actions will be taken up at an SEC Open Commission meeting on December 13, and the Public Company Accounting Oversight Board (PCAOB) is also working on revisions to Auditing Standard No. 2 (AS2).

The degree to which the SEC's and PCAOB's actions will be integrated will be closely watched; in particular, if internal auditors (or management) increase the amount of work they perform to assess (self-assess) internal control, will there be an equal reduction in work performed by outside auditors--and a reduction in audit fees? Limitations set forth in AS2 on the auditor's ability to rely on work of management and internal audit, as well as limitations on the ability of the auditor (and management) to rely on routine monitoring and testing performed throughout the year and in prior years, are things the SEC and PCAOB will revisit.

In a comment letter filed by FEI's Committee on Corporate Reporting (CCR) in September, the committee urged the SEC to "move forward with [SEC] management guidance and [PCAOB] revisions to AS2 that is more risk-focused with greater reliance on entity-level and monitoring controls, and revised materiality definitions allowing for higher thresholds."

CCR's comments were echoed by a host of other professional associations, including the American Bar Association (ABA). The ABA's comment letter called for a revised definition of materiality for purposes of the internal control assessment, and for the SEC to encourage the PCAOB to eliminate one of the two overlapping auditor reports on internal control that are required under AS2.

Like CCR, ABA recommended that the regulators use their rulemaking authority to drive a more risk-based approach to auditor attestations. ABA also suggested the PCAOB eliminate from AS2 the assertion that "reasonable assurance" equals a "high level of assurance." And, ABA recommended the PCAOB "provide guidance to small registrants on the extent to which formal controls are necessary where the registrant relies on day-to-day management oversight."

Foreign Associations Weigh In

In...