In his opening remarks at this morning's SEC-PCAOB Roundtable on second-year experiences with internal controls over financial reporting, Acting PCAOB Chairman Bill Gradison seemed to challenge SEC Chairman Christopher Cox to make Section 404 more amenable to smaller companies and their auditors.
Gradison's message at first was flexibility and more flexibility. He recalled calling on audit firms to be looser in their compliance with Auditing Standard 2--the one calling for auditor assessments of management's internal controls work--after last year's roundtable, and said he was now looking to them to dispense with more of their rigidities.
But then he zeroed in on a more specific concern. Gradison said he was "particularly concerned about small audit firms" and their ability to comply with A.S.2. "I believe we can be successful if we can communicate to them [that compliance with the standard can be] not only flexible, but scalable."
Gradison's use of the word "scalable" seemed provocative. Cox, of course, has been standoffish about the concerns of small companies, declaring in public forums that diminutive issuers should comply with the same controls provisions that their bigger brethren must comply with. The SEC chair has been vague about whether small-company compliance with 404 could be scaled down to fit small-company needs.
By asking for the ability to tell small audit firms that they can be scalable in their approach to A.S. 2 Gradison seemed to be asking Cox to come clean about scalability for corporate compliance also. That of course, begs the question of what exactly "scalability" means.
How can you tailor requirements to fit smaller companies if you don't substantively change the requirements? Won't that mean changing 404? Maybe the panels can supply some answers.
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