The Securities and Exchange Commission unanimously approved guidance yesterday aimed at helping public companies balance their internal control over financial reporting, while at the same time reducing unnecessary costs, particularly for smaller companies.
“Congress never intended that the 404 process [outlined by the Sarbanes-Oxley Act] should become inflexible, burdensome and wasteful,” said SEC Chairman Christopher Cox in a statement. “[With this new guidance] for management on the evaluation and assessment of its internal controls over financial reporting, companies of all sizes will be able to scale and tailor their evaluation procedures according to the facts and circumstances. And investors will benefit from reduced compliance costs.”
The new guidelines largely resemble those originally proposed by the SEC late last year.
SEC chief accountant Conrad Hewitt said that the guidance should allow companies to focus on risk and materiality -- the two keys to creating financial statements with integrity. The changes are especially applicable to smaller public companies, which will begin complying with Section 404 on Dec. 15 for the 2007 calendar year, and will benefit most from the scalability and flexibility of the new guidance.
The SEC also approved a few other technical amendments and voted to revise the requirements regarding the auditor’s attestation report on the effectiveness of internal control over financial reporting to more clearly convey that the auditor is not evaluating management’s evaluation process, but rather offering an opinion directly on internal control over financial reporting.
The effective date of the guidance and adopted rules will be 30 days from their publication in the Federal Register. The full text of the interpretive guidance and rules will soon be posted to the SEC Web site, www.sec.gov.
The SEC timed its project to coincide with work by the Public Company Accounting Oversight Board, which will consider its own proposed auditing standard for adoption today.
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