The Securities and Exchange Commission is sending its accounting staff to work with the Public Company Accounting Oversight Board on additional revisions to the auditing standard that has been criticized by public companies and legislators for creating costly audits of internal controls.
At a Wednesday SEC hearing, staff members of the Office of the Chief Accountant asked the commissioners for permission to work with the PCAOB to address several concerns that were raised during the current public comment period on the revised Auditing Standard No. 2 — which both regulators loosely refer to as AS5. Saying the staff will be “fine-tuning” AS5, the commissioners voted unanimously on all the staffers’ requests.
The staff will now work on matching the tone and wording of AS5 with the SEC’s revised guidance for company management on complying with Section 404, the Sarbanes-Oxley Act’s provision for management’s assessment of internal controls over financial reporting. They will also work with the PCAOB to incorporate more principles-based language into AS5, clarify how the new standard is scalable for companies of all sizes, and adopt a less prescriptive approach for how auditors will decide to use the work of others, such as a company’s internal auditors.
Both the SEC and the PCAOB released their revisions to Section 404 and AS2, respectively, in mid-December and each received more than 150 comment letters from CFOs, investor groups, legislators, and audit firms by their February 26 deadline. In many of those letters, CFOs said the two standards were not aligned and were incompatible, while others said the tone and wording of the proposed rules were too different. Some said the proposals wouldn’t produce any improvement in corporations’ and auditors’ reviews of internal controls over financial reporting.
Since then, the SEC and the PCAOB have talked informally about the issues the letter writers raised, and PCAOB members have thought about how it will revise AS5, said Mark Olson, chairman of the PCAOB. “I anticipate that the board will be able to make several improvements, including further streamlining the standard in order to provide additional flexibility to promote scalability, avoid unintended consequences, and address valid concerns,” he said.
SEC chairman Christopher Cox said he wants those improvements made before spring ends. He wants the new auditing standard ready for SEC approval by the end of May or early June, so that the audit firms can reference it for their 2007 financial statement audits.
The PCAOB was created by Sarbox as a non-government, corporate agency that falls under the SEC’s purview. As the watchdog and standard-setter for audit firms, the PCAOB’s budget and rules need the SEC’s approval. The PCAOB’s standards “couldn’t take effect if the SEC does not accept them,” Cox said.
The two most cited concerns raised in the comment letters — several of which were sent to both regulators — was the issue of alignment between the proposed standards and how the revisions will apply to small businesses. The SEC has repeatedly pushed back the deadline for non-accelerated filers — those companies with a public float of $75 million or less — to comply with Section 404 and its sister auditing standard. Even after the SEC made changes, lawmakers said the commission hadn’t done enough to address small businesses’ concerns. At the Wednesday, hearing, Cox noted that this issue has been raised by several lawmakers, including Senators Chris Dodd and John Kerry and Congressman Barney Frank. On the other hand, investor groups worry that the SEC will “roll back” Sarbox too far and risk allowing loose audits of internal controls to occur.