Regulation

Accounting Board OK’s Sarbanes 404 Rules

PCAOB members predict hikes in audit fees, warn against price gouging.
Stephen TaubMarch 10, 2004

The Public Company Accounting Oversight Board (PCAOB) has approved new Sarbanes-Oxley Act rules governing how accounting firms will audit their clients’ internal controls when reviewing their financial statements.

Under Section 404 of Sarbox, the management of a public company must assess the effectiveness of the company’s internal controls over financial reporting. The section also directed the PCAOB to produce professional standards governing independent auditors’ testing of and reporting on managements’ 404 assessments.

The auditing standard, dubbed “An Audit of Internal Control Over Financial Reporting Performed in Conjunction with an Audit of Financial Statements,” covers the work required to audit internal control and the relationship of that audit to the audit of the financial statements, according to the PCAOB.

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The internal-controls standard, which is subject to the approval of the Securities and Exchange Commission, would update the board’s current interim standards on auditing, attestation, and independence. Among its new requirements, for instance, the standard would bar auditors from providing internal-control-related services to the audit client unless that engagement had been specifically pre-approved by the audit committee.

The Securities and Exchange Commission recently postponed the corporate implementation of Section 404, with the measure now starting for companies with fiscal years ending on or after November 15, 2004. The PCAOB internal-controls standard has the same start date, although early implementation would be permitted.

The new internal-controls audit rules are sure to spawn new costs for clients. “Audit fees will almost certainly increase, to some extent, as a result” of the standard adopted by the board said PCAOB member Dan Goelzer, according to Reuters. At the same time, another board member, Kayla Gillan, warned audit firms that the new standard “is not an excuse to price gouge” their clients, the wire service added.

The Board also voted to change the registration deadline for non-U.S. accounting firms from the previous deadline of April 19 to July 19, 2004.