On May 17, 2006, the U.S. Securities and Exchange Commission (SEC) announced its plans for next steps in terms of implementation of Sarbanes-Oxley Section 404. The SEC's press release states the SEC intends to issuing further guidance for companies on how to apply a top-down, risk based approach that would be scalable, and also plans to issue a concept release for public comment.

Additionally, the SEC plans to work with the Public Company Accounting Oversight Board on revisions of its internal control auditing standard, Auditing Standard No. 2 (AS2), as well as "SEC inspections of PCAOB efforts to improve Section 404 oversight."

The SEC also stated it plans to provide a "brief further postponement" of the Section 404 requirements for the auditor's attestation on internal control for the smallest company filers, although the SEC states, "It is anticipated that any such postponement [for the smallest filers] 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. "

Further, the SEC states, "Ultimately all public companies will be required to comply with the internal control reporting requirements of Section 404." These "next steps" announced by the SEC are in response to feedback provided at the May 10 SEC-PCAOB roundtable, in comment letters, and in the report of the SEC Advisory Committee on Smaller Public Companies. The SEC also noted that as it develops guidance for management, 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.

See also PCAOB news for PCAOB's "Four Point Plan".

PCAOB Announces "Four Point Plan to Improve Implementation of Internal Control Reporting Requirements"

On May 17, 2006, the Public Company Accounting Oversight Board (PCAOB) announced plans to next steps in terms of implementation of Sarbanes-Oxley Section 404. The PCAOB's press release announces a "Four Point Plan to Improve Implementation of Internal Control Reporting Requirements" which includes: amending Auditing Standard No. 2 (AS2), reinforcing auditor efficiency through PCAOB inspections as previously announced, guidance and education for auditors of smaller companies (which the PCAOB will develop or assist in developing), and the continuation of PCAOB's Forums on Auditing in the Small Business Environment.

Further, PCAOB states that the amendments to AS2 being considered include clarifying the definitions of significant deficiency and material weakness in internal control; reconsidering the "strong indicators of a material weakness" to allow for more judgment in determining whether a deficiency exists; guiding auditors to increase their use of the work of others where appropriate; clarifying materiality and scoping decisions; emphasizing the integration of the audit of internal control with the audit of the financial statements; and allowing for and promoting auditors' use of experience gained in previous years' audits to focus and make most efficient the work in subsequent years.

PCAOB will attempt to establish an effective date for any amendments to AS2 "that would minimize any unnecessary disruption to on-going audits of internal control and would not hinder auditors' current efforts to fully implement the May 16, 2005, guidance." See also SEC news section above for SEC's "next steps" for Sarbanes-Oxley implementation announced earlier today.

See also SEC news above for SEC's "next steps" above.

Prepared May 17, 2006 by Edith Orenstein (eorenstein@FinancialExecutives.org), Director, Technical Policy Analysis, Financial Executives International (FEI). This summary does not represent FEI opinion, unless specifically noted above