The New York Times reported that the first move to implement rules governing Section 404 of the Sarbanes-Oxley Act (SOX) for smaller companies should come at the commission’s Wednesday meeting. The section requires a financial controls assessment to make sure the firm’s financial statements are reliable.
According to the news report, the SEC proposal will put into place a new materiality standard that will instruct auditors to concentrate on only those controls that could have a reasonable risk of having a material impact on the financial statements.
That approach is expected to encourage auditors to rely on prior years’ work as a basis for testing controls and discourage auditors from multiple testing of the same controls. It will encourage the auditors to use a risk assessment to focus the audit on the areas of greatest potential concern.
The news report said that the proposal features a “scaled standard” that the Times’ sources say will be flexible to the needs and characteristics of each company. A small company with complicated financial issues, like one heavily involved in derivative securities, for instance, might face more rigorous auditing of its controls than one of similar size with fewer accounting issues. Similarly, a large but relatively uncomplicated company might face a less rigorous auditing than comparably sized counterparts.
Considering Smaller Companies’ Problems
The difficulty with the financial controls auditing has been that lawmakers left it up to the regulators to determine how thoroughly that financial control audit had to be. Up until now, the commission has repeatedly put off slapping any rules on smaller companies until it considered their complaints and worked out details – a temporary exemption that benefited about four out of five of all public companies, according to the news report (See Another Extension on SOX Compliance for Small Businesses ).
The commission’s interpretation of Section 404 is the culmination of a fierce lobbying battle, pitting mega-accounting firms against a coalition of small public companies. The officials who spoke to the newspaper said the proposal would address many of the cost concerns raised by small businesses.
“It will squeeze out all the unnecessary cost,” said a senior official who was central in drafting the rule and spoke to the Times on the condition of not being identified. “What we really wanted was something that both tastes great and is less filling.”
The commission’s action is being coordinated with the Public Company Accounting Oversight Board, a sister agency that will be issuing the proposed new auditing standard under the same provision next week.