SEC Slates Meeting to Bridge Gaps on 404

In many comment letters, CFOs have said that the commission's proposed 404 guidance isn't compatible with the PCAOB's internal-controls plan.
Sarah JohnsonMarch 29, 2007

Acknowledging gaps between proposals by the Securities and Exchange Commission and the Public Company Accounting Oversight Board for complying with Section 404 of the Sarbanes Oxley-Act, the SEC will hold an open meeting next Wednesday to talk about how the two regulators can march in lockstep on internal controls.

“At the meeting the Commission’s staff will describe the remaining issues in aligning the proposed approaches, and those issues will then be considered by the Commission,” the SEC stated in a release.

Indeed, in many comment letters sent to both regulators, CFOs said the two standards aren’t aligned and are incompatible. Many of the letter writers said the tone and wording of the proposed rules are too different. Some said the proposals won’t produce any improvement in corporations’ and auditors’ reviews of internal controls over financial reporting.

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Late on Wednesday, the SEC announced that it would hold an open meeting on April 4 to discuss the PCAOB’s proposed standard for Section 404 and the standard’s coordination with the SEC’s pending proposal. The SEC also noted it plans to adopt its Section 404 revisions in May.

Within days of each other, the commission and the accounting board last December released their proposed standards for public comment. By the February 26 comment deadline, each regulator had gotten more than 150 letters.

Since companies began complying with the Sarbox provision, many have used the PCAOB’s Auditing Standard No. 2 as the de facto management guidance because they lacked such guidance from the SEC. Using the stringent audit standard has spawned overly costly and burdensome audits, SEC officials have said.

Some finance chiefs said that to meet the PCAOB’s requirements in its proposed revision to AS2—dubbed AS5—audit firms would continue to use an overly conservative approach. But that was not the intent of the proposals, according to the oversight board.

The PCAOB and many critics of the original AS2 had hoped the changes would result in cheaper auditing bills and more leeway for the use of professional judgment. But since the SEC’s proposed guidance is overly vague, finance departments will likely continue to use the PCAOB guideline to calm external auditors’ nerves, according to some CFOs, who note that AS5 is still heavily prescriptive.

The SEC announced last May that it was looking into how Sarbox’s internal-control standard could be improved. The PCAOB — which is overseen by the SEC — soon followed suit by saying it would revise 404’s sister auditing standard. The staffs of both regulators met regularly in the fall on the drafts of the revised AS2 before the PCAOB announced in December that it would repeal AS2 in favor of a new standard.

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