Tuesday, May 17, 2005
'Use your judgment on Sarbanes 404'
Companies and their auditors were yesterday told they could cut the costs of complying with the US Sarbanes-Oxley accounting and governance law by taking a more flexible approach to its implementation.
Regulators said the costs could be reduced if companies and auditors exercised better judgments when they carried out their obligations under the law. The Securities and Exchange Commission and the Public Company Accounting Oversight Board published guidance on how to make implementation of section 404 of the law easier.
Section 404 requires companies to report on the state of their internal controls, which are supposed to ensure good financial reporting and guard against fraud. Many US companies have complained about sky-rocketing costs resulting from section 404, which has proved to be the most complex and expensive provision of the Sarbanes-Oxley law.
The SEC staff, after examining first-year experiences of section 404, said: "Some non trivial costs may have been unnecessary due to excessive, duplicative or misfocused efforts."
The regulators did not propose changes to the Sarbanes-Oxley law, which they insisted had provided significant benefits by giving investors greater confidence in the accuracy of financial statements.
The costs of section 404 were driven upwards in many cases by companies and their auditors failing to take a risk-based approach to choosing which internal controls to review.
Some decided to test all controls, rather than focus on those where weaknesses could lead to accounting errors.
The SEC said: "Both management and auditors must bring reasoned judgment and a top-down, risk-based approach to the 404 compliance process."
posted by Brian Moran @ 11:27 AM