Washington - Regulatory overreaction by gun-shy auditors and corporate managers is at least partially to blame for the soaring audit expenses attributed to the Public Company Accounting Oversight Board's new rules implementing Sarbanes-Oxley Act Section 404 accounting reforms, board member Daniel L. Goelzer told business leaders here.
In a recent address to the National Association of Business Economics, Goelzer argued that "many of the Section 404-related costs and burdens that are currently attracting public attention are a consequence of the first-time implementation of what is inherently a complex and far-reaching new statutory requirement."
In some cases, he said, "Auditors and managements may be overreacting with measures that go beyond the objective of determining whether controls are in place that provide reasonable assurance that the company is able to generate financial statements free of material error."
Although Goelzer emphasized that these views do not necessarily represent the position of the board, other top PCAOB officials have voiced similar concerns.
Under Section 404 of the act, public companies must annually issue a management report concerning the effectiveness of the company's internal control over financial reporting. Additionally, the company's auditor must attest to the accuracy of this report, and must further report on the effectiveness of the client's internal controls.
For his part, Goelzer characterized these new requirements as "corollaries to the longstanding requirement in the Securities Exchange Act of 1934 that all public companies must maintain accurate books and records and an adequate system of internal accounting control."
From that perspective, he suggested that the new rules merely require accountants to perform tasks that they should have been doing all along.
Goelzer described the current upsurge in audit fees as "inevitable" costs resulting from the "learning curve" facing the profession under SOX.
"This is the first time through an entirely new process," he said. "While it is difficult to estimate how much is first-year cost and how much will be recurring, it seems clear that, as managements and auditors gain experience with this new requirement, the costs will fall."
However, he said that the benefits of the new standards would be more difficult to quantify, and will take longer to realize. "Many of the benefits of stronger controls and regular review of controls will appear over time," he said "One could fairly expect that there will be fewer restatements, fewer SEC financial reporting cases, and fewer successful private actions involving accounting fraud as a result of Section 404."
It will, however, take several annual reporting cycles before the board can determine whether these benefits are, in fact, accruing, he acknowledged.
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