The US Securities and Exchange Commission (SEC) has
unanimously approved new guidelines forSection 404 of the Sarbanes-Oxley
Act(SOX) that are designed to help public
companies better assess the strength of their internal controls
over financial reporting and thus ease the costs of complying
with the 2002 law, especially for
small to medium sized businesses (SMBs).
The long-promised new guidelines make good on testimony from SEC
Chairman Christopher Cox before the Senate last month. Cox had said
that the nation's regulatory body indeed felt the pain inflicted by
Section 404, particularly on SMBs, and acknowledged its
requirements as laid out had proved "too expensive for
everyone."
"Congress never intended that the 404 process should become
inflexible, burdensome and wasteful. The objective of Section 404
is to provide meaningful disclosure to investors about the
effectiveness of a company's internal controls systems, without
creating unnecessary compliance burdens or wasting shareholder
resources," Cox said in a statement yesterday.
SOX was initially passed as a protection for investors in the
wake of the financial wrongdoing at Enron Corp. and other corporate
scandals. It has come
under fire by businesses groups for costing
far more than anticipated and undercutting the ability of
American corporations to compete in the world markets. Some
firms have had to make
costly IT upgrades to achieve compliance.
Section 404, considered the most onerous requirement, says
publicly traded companies must show their internal financial
controls are accurate and must have an auditor sign off on
management's assessment. The meager guidance on 404 from the SEC
prompted many companies to err on the expensive side of caution,
creating a thriving cottage industry for auditors and consultants
who were happy to oblige.
The new guidance, which applies to companies of all sizes, was
spurred by this year's deadline requiring smaller public companies
to also comply with the law. Companies with a market value of less
than $75 million had been given more time to comply with the
law.
John W. White, director of the SEC's division of corporation
finance, said yesterday that the new guidelines "reduce uncertainty
about what constitutes a reusable approach to management's
evaluation." Yet they're flexible enough so companies don't have to
jettison the "procedures and tools" they've developed to serve the
company and its investors, he added.
The Public Company Accounting Oversight Board (PCAOB), the SEC's
partner in compliance, is expected to vote today on new rules for
auditors that are intended to help companies take a top-down
approach to SOX, rather than the costly laundry list approach of
recent years.
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Linda Tucci, Senior News
Writer