SEC considers delaying some requirements

by Ken Rankin

Orlando, Fla. — Fearful that the pace of accounting reform is putting auditors and their corporate clients on “overload,” regulators at the Securities and Exchange Commission are now giving serious consideration to temporarily delaying implementation of key Sarbanes-Oxley Act initiatives.

Word of a possible regulatory slowdown surfaced recently when SEC chief accountant Donald T. Nicolaisen told professionals at the American Accounting Association’s annual meeting, here, that commission staffers are concerned that auditors and public companies may have difficulty properly implementing new rules requiring the management of public companies to provide an assessment of the effectiveness of internal control over financial reporting.

Those rules, developed by the Public Company Accounting Oversight Board and given a final blessing by the SEC in June, would require auditors to move quickly to implement the new reporting requirements.

Under the commission-approved timetable, accelerated filers will be required to provide management’s assessment of the effectiveness of internal control for fiscal years ended after Nov. 15, 2004, while the cut-off date for smaller companies and foreign private issuers will be July 15, 2005.

In his address to the meeting of accounting educators, Nicolaisen said that, of all the SOX Act reforms, “I believe that the internal control requirements may have the largest effect on improving the reliability of financial reporting.”

For that reason, “it is absolutely critical that we get the internal control requirements right,” he said. “In fact, it’s so important that the SEC staff is considering whether to recommend that the implementation of other initiatives be delayed, at least temporarily, because we want management and their auditors to put the appropriate emphasis on these requirements and to get them right the first time around.”

The chief accountant offered no hint at which other SOX provisions may be postponed to give auditors more time to digest the new internal control reporting requirements. He did, however, stress the need for accounting standards-setters to recognize the disproportionate burden that may be imposed on smaller businesses that struggle to comply with costly new accounting requirements.

“I realize that we are doing a lot in the standards-setting and rulemaking arenas, and I know that there is a concern with overload,” he told the meeting. This is particularly true for smaller companies that lack the resources to grapple effectively with shifting accounting standards.

“During the commission’s Sarbanes-Oxley rulemaking initiatives, we received many comments focusing on the increased burden that the proposed rules would place on smaller-sized public companies,” Nicolaisen told the accountants. “I have heard similar concerns expressed about the impact of some of FASB’s proposed standards, such as its exposure draft on accounting for stock options.”

As a general matter, Nicolaisen said, “small business should be expected to adhere to those same standards to the extent that they have like transactions.” But, at the same time, he acknowledged that “the burden to smaller companies can be disproportionate and needs to be appropriately weighed against the protection of investors.”

“This balancing act is something that I will continue to closely monitor, and it is also an important consideration for FASB and the PCAOB,” Nicolaisen said. “Clearly, we all need to strike the right balance.”

During his remarks to the group, the chief accountant also disclosed that:

  • An SEC report to Congress on “off-balance-sheet transactions” is “well under way,” and the findings of that Sarbanes-Oxley-mandated report are likely to be of “interest” to accountants;
  • The “private sector” should be encouraged to consider developing an internal control framework designed specifically to address small business needs; and,
  • The SEC staff is considering whether to accept voluntary supplementary filings of financial data using data gathering and analysis tools, such as the Extensible Business Reporting Language, or XBRL, on a voluntary basis beginning with the 2004 calendar year-end reporting season.

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