Public Company Accounting Oversight Board and the SEC each issued guidance for auditors and corporations to mitigate the cost of complying with Section 404 of the Sarbanes-Oxley Act without jeopardizing the provision's benefits. Section 404 "aims to strengthen the internal controls that underpin the accuracy and reliability of a company's published financial information," according to a PCAOB statement. The provision "requires a public company to annually report its assessment of the effectiveness of its internal control over financial reporting."
The board's policy statement focused mainly "on the scope of the internal control audit and how much testing of a company's internal control over financial reporting is required."
Both the PCAOB and SEC in their statements were critical of a "mechanistic, check-the-box exercise" for implementation of the standard and endorsed reliance on more judgment of auditors to evaluate the internal controls
"It is clear to us that the internal control assessment and audit process has the potential to significantly improve the quality and reliability of financial reporting," William J. McDonough, PCAOB chairman, said in the statement. "At the same time, it is equally clear to us that the first round of internal control audits costs too much. Through the guidance we issue today, as well as our upcoming inspections, we are committed to seeing that (the provision) is implemented in a manner that captures the benefits of the process without unnecessary and unsustainable costs."
The SEC statement sought also to address concern that Section 404 has had "a chilling effect in the level and extent of communications between auditors and management regarding accounting and financial reporting issues." The statement also was a response to concerns raised by auditors, corporate officials and investors at a roundtable on the implementation of Section 404.
