SEC, PCAOB Relieve Companies Grappling With Internal Control Standards

It's no secret that many companies, especially smaller ones, have had problems complying with Section 404 of the Sarbanes-Oxley Act, which requires internal control over financial reporting. Now, the U.S. Securities & Exchange Commission (SEC) and Public Company Accounting Oversight Board (PCAOB) hope new guidance and an auditing standard will alleviate some of the burden.

On May 23, the SEC unanimously approved interpretive guidance to help public companies strengthen their internal control over financial reporting while reducing unnecessary costs, particularly at smaller companies (visit http://www.sec.gov/news/press/2007/2007-101.htm). The SEC intends the new guidance to enhance Section 404 compliance by allowing management to focus on the internal controls that best protect against the risk of a material financial misstatement.

And on May 24, the PCOAB voted to adopt Auditing Standard No. 5, An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements, which replaces Auditing Standard No. 2 (visit http://www.pcaobus.org/News_and_Events/News/2007/05-24.aspx). Standard No. 5 is principles-based and designed to increase the likelihood that material weaknesses in internal control will be found before they result in material misstatement of a company's financial statements, and, at the same time, eliminate procedures that are unnecessary.