The Securities and Exchange Commission endorsed the recommendations of the agency's professional staff to eliminate, “waste and duplication,” in companies’ compliance with the Sarbanes-Oxley Act.The change is particularly aimed at providing relief for smaller companies.

The SEC told its staff to focus their remaining work in four areas:

  • Aligning the PCAOB's new auditing standard (AS-5) with the SEC's proposed new management guidance under Section 404, particularly with regard to prescriptive requirements, definitions and terms;
  • Scaling the 404 audit to account for the particular facts and circumstances of companies, particularly smaller companies;
  • Encouraging auditors to use professional judgment in the 404 process, particularly in using risk-assessment; and,
  • Following a principles-based approach to determining when and to what extent the auditor can use the work of others.

The SEC staff was also urged to continue working closely with the Public Company Accounting Oversight Board to make the internal controls provisions of Section 404 more efficient and cost effective. Under Sarbanes-Oxley, PCAOB audit standards must first be approved by the SEC and cannot take effect without a vote of the commission.The commission expects the new PCAOB standard to be submitted for SEC review by the end of May or early June, in time for the 2007 financial statement audits.
"These needed improvements in the Sarbanes-Oxley process are especially urgent for smaller companies, who will begin complying with Section 404 this year," said SEC Chairman Christopher Cox. "The result of the new auditing standard for 404, together with the SEC's new guidance to management, should make the internal control review and audit more efficient by focusing the effort on what truly matters to the integrity of the financial statements," he added.

Cindy Fornelli, executive director of the Center for Audit Quality (which is affiliated with the American Institute of CPAs) said that the SEC’s discussion around the regulators’ proposals showed that both groups support the importance of a "robust examination" of financial records.

“The discussion properly focused on scaling the audit, regardless of the size of the company, in a fashion based on the company’s specific circumstances, and on allowing the auditor to use his or her professional judgment in making that determination,” Fornelli said, in a statement.

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