Houston, TX -- (ReleaseWire) -- 08/11/2006 --If approved, the good news is that small public companies not previously required to comply with SARBOX 404 now have a two-pronged approach beginning with year-ends after December 15, 2007. The Form 10-K filed after this date will require management’s assessment. The following reporting year-end the company will be required to have an auditor’s attestation report on internal controls over financial reporting (an integrated audit).
It appears the SEC will stick to its requirement that all registrants comply and this is the last compromise they intend to give. It’s apparent this delay was given due to the outcry from non-accelerated filers over the cost experienced by the accelerated filers due to the over zealousness of the audit firms involved; mainly the Big Four. I have always espoused that the extent of documentation, testing and monitoring that the accelerated filers experienced was not the intent of the Sarbanes Oxley Act of 2002.
If you read the Sarbanes Oxley Act of 2002, it is specific in internal controls over financial reporting, and this does not include all internal controls over safeguarding of assets and information. Yes, it is a good idea and good business to have strong internal controls over safeguarding of assets, but this does not extend to excessive costs from audit firms in requiring and testing the controls that have no material impact on financial reporting.
The PCAOB has repeatedly sent this message as noted in the following:
PCAOB Chairman William McDonough, May 16, 2005
“At the same time, it is equally clear to us that the first round of internal control audits cost too much. Through the guidance we issue today, as well as our upcoming inspections, we are committed to seeing that AS No. 2 is implemented in a manner that captures the benefits of the process without unnecessary and unsustainable costs.”
PCAOB November 30, 2005
“The Board’s monitoring revealed that some audits performed under these difficult circumstances were not as effective or efficient as Auditing Standard No. 2 intends and as the Board expects they can be in the future, given the benefits of experience, adequate time and resources.”
Remarks of Board Member Daniel L. Goelzer in July 2006
“However, internal control reporting has come at a high cost. One study has found that, in the first year of reporting, the average total cost of compliance was $8.5 million for large companies with market caps over $700 million and $1.2 million for small.”
“We want to make sure that the auditor’s work focuses on the controls that prevent or detect the highest risks of material misstatements in financial reports. We also want the financial statement audit and the internal control audit to be integrated -- that is, performed as a single process. We are also looking for other ways to make sure that internal control audits are as efficient as possible.”
The audit firms of the accelerated filers have not heeded this message nor have they had an incentive as they have increased revenues and chargeability of staff, and reduced the number of clients by retaining only those with the larger fees. This is a great recipe for partner profitability.
If you are a small business, IPO or foreign SEC registrant, it is advised that you acknowledge the following:
1. Start now. Not next week, next month or the first of the year. NOW. Begin planning and assembling your team players.
2. You will need two CPA firms. One as your auditor, and another to be your advisor in accounting matters, your SARBOX 404 advisor, and your specialist in such areas as financial reporting of income taxes.
3. Top management and the BOD will be active in the process. This is a critical component of staying on task and controlling costs.
4. Your accounting and auditing costs are going to increase.
The CPA firm of Easley, Endres, Parkhill & Brackendorff has developed the Top-Down Approach (TDA) for companies either (1) through guidance as a company’s independent auditor or (2) through extensive planning, development and implementation for non-audit clients
When addressing SARBOX 404 compliance using TDA, keep the following in mind:
A. The Sarbanes-Oxley Act focuses on internal control over financial reporting. Materiality is a factor. The focus is on significant transactional flows and estimates.
B. The independent auditor rendering an opinion on internal control over financial reporting must obtain sufficient competent evidence about the design and operating effectiveness of controls over relevant financial statement assertions related to the significant accounts and disclosures in the financial statement.
C. The goal is to optimize internal control policies and procedures to satisfy A and B in order to comply with SARBOX 404; not to build and document all internal controls over safeguarding of assets.
D. It is not rocket science. Use common sense and be open to new procedures to accomplish the internal controls over financial reporting.
E. Be confident in your assessment and be prepared to defend your position.