SEC Meeting April 4 To Align SEC, PCAOB 404 Proposals

March 28, 2007

FEI Summary

On March 28, 2007, the SEC announced it will hold an open commission meeting on April 4 to discuss aligning the SEC’s proposed management guidance on internal control reporting with the PCAOB’s proposed auditing standard to replace Auditing Standard No. 2 (AS2)  - already informally dubbed ‘AS5.’  The SEC says this discussion will help further its goal of considering adoption of final guidance for management by May, 2007. 

SEC Responds to Calls for Alignment Voiced by FEI, Others

The need for alignment between the SEC’s and PCAOB’s Sarbanes-Oxley Section 404 related proposals was highlighted in comment letters filed by FEI’s Committee on Corporate Reporting (CCR) and Small Public Company Task Force (SPCTF), available here.

FEI’s CCR said it supported the SEC’s proposed guidance, but had two critical concerns:

·         First, management guidance and external audit standards must be aligned. We believe that the proposed standards, although improved from the existing PCAOB Audit Standard No. 2 (“AS2”), are still more detailed and prescriptive than the proposed guidance. These differences could result in external audits that are more conservative than management assessments, which will cause companies to incur unnecessary costs to remain aligned with their external auditors.

·         Second, for companies to implement the proposed guidance successfully in alignment with their external auditors, the auditors must be assured that the inspection practices of the PCAOB will align with the proposed auditing standards.

CCR made various other suggestions for clarifications or enhancements to the proposed guidance, including but not limited to the following:  

·         Focus on change in controls for testing, allowing for rotational testing of controls that have operated effectively in the past and have not changed

·         Increased reliance on entity-level controls to reduce process-level testing

·         Elimination of the “interim” financial statement component from the definition of material weakness”

FEI’s SPCTF said it “join[s] with CCR in commending the SEC for its role in proposing guidance for management to make its internal control assessment more efficient and effective.” FEI’s SPCTF made several recommendations for improvements to the proposed guidance.

The SEC’s April 4 open meeting will be held at the SEC and webcast.

Prepared March 30, 2007 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.