Washington (March 10, 2004) -- The Public Company Accounting Oversight Board gave a thumbs up to a controversial new auditing standard that requires auditors to review and attest to the effectiveness of corporate internal control over financial reporting -- a mandate that some boardroom execs fear may sharply increase the cost and complexity of external audits.

The standard -- which must be approved by the Securities and Exchange Commission -- not only requires auditors to attest to the accuracy of management’s assessment of internal controls, but also details the work that accountants will have to perform as part of these audits.

In approving the new standard, PCOAB officials conceded that audit fees would climb as a result of these new requirements, but insisted that the benefits would outweigh the costs.

“As we heard from many public companies, these requirements are tough and they will require extra work and expense,” board chairman William McDonough said during a public meeting yesterday at which the standards were adopted. But he maintained that these costs are justified because “the goal is to obtain the best possible assurance that a company’s financial statements are reliable.”

The standards, which were originally proposed late last year, drew nearly 200 comments, including many from corporate officials who complained that the board exceeded the requirements of the Sarbanes-Oxley Act by calling for a “detailed audit” of each client’s internal controls.

Responding to those complaints, board member Kayla Gillan said that, “many public companies who commented on the original proposal seem to expect the auditors to use a minimalist approach to the new responsibilities mandated by SOX. They seem to want a simple rubber stamp on management’s assessment of the effectiveness of these controls.”

But despite dismissing corporate pressure for a softer standard, the board did agree to a number of modifications to the original plan that PCOAB officials said should make internal control auditing more affordable to small and mid-size companies. One key change from the original version loosens proposed restrictions on the ability of independent auditors to rely on the work of “others” (i.e. internal auditors) in assessing the client’s internal controls.

“We found that internal audit programs that are both highly competent and independent from company management represent a valuable long-term tool for increasing financial reporting reliability,” Gillan explained. If companies strengthen their internal audit programs, “the auditor should be able to rely more readily and extensively on these internal experts, thus reducing the external auditor’s fee,” she reasoned.

Gillan also served notice that the PCAOB would be on the lookout for attempts by accounting firms blame the new standards for excessive increases in audit fees. “The work that auditors must now perform with respect to internal controls is not an excuse to price gouge,” she said. “I urge any company that believes its auditor is overcharging for this work to contact us.”

In addition to approving the new internal control auditing standard, the PCAOB also agreed to seek SEC approval for delaying the registration deadline for non-U.S. accounting firms from April 19 to July 19, 2004.

-- Ken Rankin

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