On April 4, in an unusual open meeting, the Securities and Exchange Commission approved four recommendations made by the SEC staff with respect to their work with Public Company Accounting Oversight Board to resolve the remaining issues on simplifying Section 404 of the Sarbanes-Oxley Act of 2002. This endorsement came after a previously scheduled meeting among the SEC’s commissioners and the members of the PCAOB and was, according to SEC Chairman Cox, part of an effort to “keep us on track” in ongoing efforts to revise Section 404.
The SEC urged their staff to continue to work closely with the PCAOB and concentrate on four main areas:
- aligning the PCAOB’s new auditing standard, referred to as AS-5, with the SEC’s proposed new management guidance under Section 404;
- scaling the Section 404 audit to account for a company’s size and circumstances;
- encouraging auditors to use professional judgment in the Section 404 process, particularly in using risk-assessment; and
- following a principles-based approach to determining when and to what extent an auditor can use the work of others.
The SEC and the PCAOB are under considerable pressure to make compliance with Section 404 more cost efficient for smaller companies and their investors and to implement the new audit standards and management guidance in time for 2007 financial statement audits.
The PCAOB audit standards must be approved by the SEC before they can take effect. The SEC expects the new Section 404 standards to be ready for its review by the end of May or early June, in time for the 2007 financial statement audits.