Orlando, Fla. (Aug. 13, 2004) -- Fearful that the pace of accounting reform is putting auditors and their corporate clients on “overload,” regulators at the Securities and Exchange Commission are giving serious consideration to temporarily delaying implementation of key Sarbanes-Oxley Act initiatives.

Word of a possible regulatory slowdown surfaced when SEC chief accountant Donald T. Nicolaisen told professionals at the American Accounting Association’s annual meeting in Orlando, Fla., on Aug. 10 that commission staffers are concerned that auditors and public companies may have difficulty properly implementing new rules requiring the management of public companies to provide an assessment of the effectiveness of internal control over financial reporting.

Those rules, developed by the Public Company Accounting Oversight Board and given the SEC's blessing in June, will require auditors to move quickly to implement new reporting requirements. Under the timetable approved by the commission, accelerated filers will be required to provide management's assessment of the effectiveness of internal control in financial statements for fiscal years ended after Nov. 15, 2004, while the cut-off date for smaller companies and foreign private issuers will be July 15, 2005.

Of all the SOX reforms, Nicolaisen said, “I believe that the internal control requirements may have the largest effect on improving the reliability of financial reporting.” For that reason, “It is absolutely critical that we get the internal control requirements right,” he added. “In fact, it's so important that the SEC staff is considering whether to recommend that the implementation of other initiatives be delayed, at least temporarily, because we want management and their auditors to put the appropriate emphasis on these requirements and to get them right the first time around.”

Nicolaisen offered no hint at which SOX provisions may be postponed. He did, however, stress the need for accounting standards-setters to recognize the disproportionate burden that may be imposed on smaller businesses that struggle to comply with costly new accounting requirements.

“I realize that we are doing a lot in the standards-setting and rulemaking arenas, and I know that there is a concern with overload,” he told AAA members. This is particularly true for smaller companies that lack the resources to grapple effectively with shifting accounting standards.

“During the commission's Sarbanes-Oxley rulemaking initiatives, we received many comments focusing on the increased burden that the proposed rules would place on smaller-sized public companies,” Nicolaisen said. “I have heard similar concerns expressed about the impact of some of the Financial Accounting Standards Board’s proposed standards, such as its exposure draft on accounting for stock options.”

As a general matter, he said, “Small business should be expected to adhere to those same standards to the extent that they have like transactions.” At the same time, he acknowledged, “The burden to smaller companies can be disproportionate and needs to be appropriately weighed against the protection of investors."

“This balancing act is something that I will continue to closely monitor, and it is also an important consideration for FASB and the PCAOB,” Nicolaisen said. “Clearly, we all need to strike the right balance.”

-- Ken Rankin

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