Speaking at a New York State Society of CPAs conference earlier this week, Conrad Hewitt declined to speak in absolutes when it came to across-the-board implementation of the Sarbanes-Oxley Act’s infamous Section 404.The Securities and Exchange Commission chief accountant avoided absolutes when speaking on the question of compliance for micro-cap companies -- the first time that I’ve heard a federal regulator hedge their bets on implementation that’s currently planned for 2008. It would be far from the first deferral for companies will market capitalizations under $75 million -- but the first ray of hope for those small companies since the SEC declined to strongly move forward on a number of recommendations outlined last year by an advisory committee.
The SEC and the Public Company Accounting Oversight Board both issued statements last year forming the broad outlines for a new SOX Auditing Standard No. 5 -- which would use materiality considerations as the key factor in helping companies reduce the cost of complying with the law. But Hewitt told the conference that if the new standard doesn’t succeed in driving costs down, something else will have to be done. And small companies might not have to have to complete an internal controls audit by external auditors until 2009.
It was just last fall that PCAOB member Charles Niemeier told attendees at another NYSSCPA conference that there’s nothing new to be found in SOX -- and while internal control tweaks are coming and that the standards outlined will eventually be more user-friendly, SOX is more about enforcement than changing the nature of audit work.
To me, that’s argument enough for across-the-board implementation. But looking at the question from the side of a small company trying to find capital, it has to be nice to know that there are exceptions to the rule, despite the frustrations of 404 compliance always looming in a future that never seems to arrive.
But on Monday, Hewitt also struck a now-familiar chord on the question of defining and weighing materiality in the implementation of SOX -- saying that the benefits of the law are failing if they don’t equal the costs to investors. Considering that the SEC’s mission is to investors first, that’s a useful way of framing the issue and allowing for the reality that one size doesn’t always fit all.
Along those same lines, Hewitt said that he and SEC Chairman Christopher Cox have discussed the creation of a panel to examine the issue of accounting complexity and ways to eliminate it -- a project whose end result could easily be incorporated into the future of SOX. The timeline for that panel, which Hewitt hopes to announce within the next six months, already seems a bit more defined.
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