So, how's it going?
With no exception I can think of, every investor advocate on this morning's panels insisted that 404 should not be changed. Although there are variations in the levels of material weaknesses being reported, they said, the market is capable of making those distinctions (an assertion backed up by data from former SEC Chief Accountant Lynn Turner, showing that the stock market impact of a material weakness announcement varied widely).
Moody's also said that it was evaluating material weaknesses, and that in some cases it had resulted in changed credit ratings. Moody's also suggested that there not be a change to the material weakness standard.
With the possible exception of the Chamber of Commerce's suggestion that the pass/fail audit approach to 404 be changed, few companies suggested major changes to 404. Many urged the PCAOB to push auditors to be more flexible, although panelists grappled with the difficulty of making audit firms use their judgment.
As expected, audit firms came in for wide criticism for their inflexiblity and lack of judgment. By the end of the morning, that even led E&Y's CEO to protest that it was hard not to take it personally.
Audit firms also came in for criticism of their IT audits, which led to some of the sharpest debates of the morning, as the AFL-CIO representative and some company representatives sparred over the degree to which IT control weaknesses were likely to affect financial reporting.
The PCAOB's McDonough ended the morning session by sternly warning that the PCAOB would be even-handed in its review of 404 audits. That is, he said, the PCAOB would come down just as hard on audit firms for excessive audits as for inadequate audits. |
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