CIO —
The U.S. Securities and Exchange Commission (SEC) is on Wednesday expected to start the process to modify existing auditing provisions for small, public firms within the Sarbanes-Oxley Act of 2002 (Sarbox) when it presents new rules related to section 404 of the act, The New York Times reports.
Under section 404 of Sarbox, publicly-traded firms are required to evaluate and document the safeguards they have in place to make sure their financials are reported accurately, the Times reports.
The modification of the auditing provisions marks a compromise between the businesses that have pushed for a looser standard to avoid unnecessary burden and costs associated with compliance, and the accounting firms that have profited by contracting out more auditors to help the companies meet the section 404 requirements.
The degree to which auditors must examine companies’ financial controls was left up to Congress to decide, and it has not yet imposed section 404 rules on many smaller public firms because it wanted to take the time to consider the issues raised by such companies, according to the Times.
Critics of the antifraud law have blasted it in recent days, saying the act is difficult to work with and the costs of compliance are too high. Alan Greenspan, former head of the U.S. Federal Reserve, recently criticized Sarbox at an AMR Research leadership event in Boston.
The SEC proposal will include a “materiality standard” to urge auditors to focus on only financial controls that present reasonable risk of significant impact on financial statements, the Times reports. As a result, auditors will likely start to look to previous years’ audits to determine which controls should be vetted, according to the Times. The new proposal will also likely lead auditors to build “risk assessments” in order to help them center their efforts on the most appropriate areas, the Times reports.
The SEC is working on the proposal with its sister agency, the Public Company Accounting Oversight Board, which will also issue the proposed standard under the same provision next week, according to the Times.
Over the past month or so, regulators have provided some information regarding the framework for the new rules, and they’ve been working on a “scaled standard” that could be tailored to meet the specific needs of different sized firms, the Times reports. For instance, a smaller sized firm with a number of financial complications may have to meet more stringent regulations than a comparable sized company with fewer financial issues, according to the Times.
