SEC OKs Internal-Control Audit Standard

The rule sets up a voluntary audit engagement in which an auditor would opine between quarters on whether a client's material weakness still exists.
Helen ShawFebruary 13, 2006

The Securities and Exchange Commission approved a Public Company Accounting Oversight Board standard last week telling auditors how to report on whether a client’s previously reported material weakness in internal controls over financial reporting still exists. Since companies already have to report — and auditors opine — on the status of controls gaps in their 10Qs and 10Ks, such reports would be made within a quarter.

Auditing Standard No. 4, which the PCAOB adopted on July 26, 2005, establishes a stand-alone, voluntary engagement in which an auditor would express an opinion on whether the reported material weakness in internal controls over financial reporting under Section 404 of the Sarbanes-Oxley Act still exists.

The PCAOB believes that companies will weigh the benefits of the boost in investor confidence in their financial reporting they could gain by an auditor signoff against the costs of such an engagement, according to the board’s release on its proposed standard last summer.

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Further, the board declared that such engagements are likely to be best for reporting on discrete material weaknesses with a restricted effect on a company’s internal controls rather than material weaknesses that have a “pervasive effect.” In a case with a pervasive weakness, the PCAOB expects that a company would choose not to undergo a stand-alone engagement and instead wait for the auditor’s annual report.

While the SEC said in a release announcing its approval of the standard that “the proposed rules provide a reasonable format” for assessing whether a material weakness exists, it expects the PCAOB “to issue a clear and concise outline of the affirmative audit steps set forth in the standard” within 90 days of the commission’s approval on February 6.