Financial Reporting


At an open meeting in April, the SEC endorsed the recommendations of the agency’s professional staff to eliminate waste and duplication in Sarbanes-Oxley section 404 compliance, a move intended to benefit smaller public companies.

The SEC’s direction to its staff will focus on aligning the PCAOB’s new auditing standard (AS-5) with the SEC’s proposed new management guidance under section 404, particularly with regard to prescriptive requirements, definitions and terms; scaling the 404 audit to account for the particular facts and circumstances of companies, especially smaller companies; encouraging auditors to use professional judgment in the 404 process, particularly in using risk-assessment; and following a principles-based approach to determining when and to what extent the auditor can use the work of others.

The Sarbanes-Oxley Act requires PCAOB audit standards to be approved by the SEC. At press time, the PCAOB standard had not yet been submitted for SEC review, but a statement by the commission indicated that it expects the PCAOB to submit the standard by late May or early June—in time for 2007 financial statement audits.

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