Thanks to some fast footwork by regulators at the Securities and Exchange Commission and the Public Company Accounting Oversight Board, accounting firms and many of their smaller audit clients gained an additional 45 days of breathing room to comply with complex new Sarbanes-Oxley Act internal control reporting rules.
Under those rules, public companies will be required to include in their annual reports both an assessment by management of the effectiveness of the company's internal controls and a report by the auditors on the internal control assessments made by management.
The first batch of corporations to be effected by those new reporting requirements are "accelerated filers" with fiscal years ending between Nov. 15, 2004, and Feb. 28, 2005.
Many corporate officials, as well as auditors, have complained that the implementation timetable for these new reporting rules would make compliance difficult and burdensome, particularly for smaller firms.
In announcing the 45-day "exemptive order," SEC chief accountant Donald Nicolaisen said that his agency "is sensitive to resource constraints at accounting firms and at smaller public companies, and is taking this step to facilitate the successful and effective implementation of the [SOX] internal control requirements."
The additional 45-day compliance grace period will apply to accelerated filers that had a public equity float of less than $700 million at the end of their second fiscal quarter in 2004.
In conjunction with the SEC's action, the PCAOB rushed through a rule change of its own, granting accounting firms additional time to comply with the board's Auditing Standard No. 2, which requires auditors to attest to the internal control assessments made by client management.
Under the PCAOB's "temporary transitional rule," auditors of companies covered by the SEC's compliance extension will be relieved of the requirement that their internal control reports be dated to coincide with their report on the company's financial statements. Auditors also will be excused from the requirement that their financial statement report contain a reference to the separate report on internal control.
Citing what he called "anecdotal" reports that accounting firms were struggling to meet the timetable for compliance with the board's new internal control reporting requirements, PCAOB Chairman William McDonough called the temporary relaxation of those rules "another part of our effort to make implementation proceed smoothly."
The new internal control reporting standards represent a significant change for auditors and their clients, and "the important thing is to make sure that the change goes smoothly, not whether the change occurs on its original deadline," McDonough said.
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