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Thursday, February 02, 2006
A Misguided Exemption
By ARTHUR LEVITT, JR
January 27, 2006; Page A8
The SEC and PCAOB should urge accounting and financial executive trade groups, as well as the software industry, to work together to develop reasonably priced tools tailored specifically for small companies and the small accounting firms who mainly audit them. These should permit a company to document internal controls so that auditors do not need to duplicate the documentation, and include control testing programs integrated with that documentation and the work performed on the year-end balance sheet and income statement. The tools must be made available before 2007 when small companies are required to comply with 404.
While the SEC and PCAOB have issued some helpful guidance on how to streamline the auditing of internal controls, they should go further in easing requirements while stepping up enforcement. If a company has documented monitoring controls, and the monitoring process has not discovered any problems except for isolated cases, then no further internal examination by the company should be required. Re-examining controls when monitoring controls are working has layered on unnecessary work that has driven up costs for businesses. Companies should be given credit for doing the right thing, and not have to pay to recheck what they are doing right. However, if the auditor finds that monitoring controls have not been working and financials need to be restated, then a company should expect a swift SEC enforcement action.
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