SEC: new views on internal controls
DJ: Cos,Auditors To Get New Views On Internal Controls
By Judith Burns Of DOW JONES NEWSWIRES
WASHINGTON (Dow Jones)--The Public Company Accounting Oversight Board staff will release guidance Monday to help public companies and their auditors comply with internal-controls requirements.
The staff guidance, in question-and-answer form, will be accompanied by a policy statement from the five-member oversight board which may have more of an impact, according to individuals familiar with the matter.
The Securities and Exchange Commission staff has drafted guidance as well, although final details - such as whether it will be issued by the staff or the SEC itself - are still being discussed.
"The most important thing is to get useful guidance to the issuers and the auditors," SEC Commissioner Roel Campos told reporters Friday.
Last month, oversight board Chairman William McDonough promised regulators would provide additional guidance quickly after hearing complaints at a public meeting at the SEC on the internal-controls reviews. Accountants, executives and corporate directors took part in the day-long session.
The PCAOB staff guidance will address some of the big stumbling blocks for companies, including the scope of internal-controls reviews, according to individuals familiar with the matter. The board's policy statement aims to put the technical guidance in context and reiterate the need for auditors to use a flexible, risk-based approach, avoiding a one-size-fits-all model.
"I think this will help," said former Commerce Secretary Barbara Franklin, who now heads her own company and sits on the board of five others, including Aetna Inc. (AET), Dow Chemical Co. (DOW) and MedImmune Inc. (MEDI). She hopes regulators give auditors more latitude to focus on controls that pose the biggest risk to financial reports.
Critics say the review process has been too detailed, and could result in auditors missing the big picture by focusing on insignificant items.
Cost is another issue. Large companies say they are spending millions of dollars to comply with the new requirement, and smaller companies fear they may be hard-pressed to foot such bills.
"We're particularly concerned about the cost," Campos acknowledged. He said the SEC's guidance will stress the need for "cost-benefit analysis," and said relying more on internal auditors and scaling back some testing could help keep costs in check.
Groups and companies have balked at the mounting audit costs. The American Bankers Association said one of its member banks paid $600,000 for its 2004 audit, more than three times the $193,000 it spent in 2003. Banks have been subject to internal-controls rules for years, but say the transition to the new requirements hasn't been smooth. The bankers' group has called for guidance that would encourage risk-based audits and eliminate unnecessary duplication by internal and external auditors.
Franklin said she expects "there will be cost reduction" if the scope of audit work on internal controls is cut back. She figures costs will decline in any case as companies and auditors get more familiar with the review process.
GenVec Inc. (GNVC) gave Franklin a close-up look at how costs can pinch smaller companies. She said the biotech company spent up to 5% of its annual cash "burn" on its internal-controls review, which she worries is "a little too much" for growing companies to bear.
"We should find a way to lighten their load," Franklin commented.
Whether guidance alone will suffice remains to be seen. Franklin said the PCAOB's standard on internal controls may need to be revisited, but noted that is a lengthy process that wouldn't provide immediate relief.
"Companies need the guidance now," said Franklin.
AFL-CIO associate general counsel Damon Silvers said SEC and oversight board officials worry that auditors are taking a "rigidly mechanistic approach" to the reviews and may view them as a way to "bill more hours."
Silvers, who serves on a PCAOB advisory group, said he would welcome additional guidance provided it doesn't undercut an independent, annual review of corporate internal controls. "I don't think they ought to be messing with the standard," he added.
Congress adopted stricter internal-controls requirements for public companies as part of the 2002 Sarbanes-Oxley Act, a sweeping reform package spawned by corporate-accounting scandals. By law, public companies must conduct an annual assessment of internal controls over financial reporting, subject to a further review by the company's outside auditor. Big flaws in controls must be reported to investors and the SEC. Controls can be as simple as requiring two signatures on checks for large sums, or involve complex computerized systems to track finances.
Larger public companies came under the internal-controls review requirement starting late last year. Smaller U.S. public companies and foreign companies whose securities are traded in the U.S. got a one-year delay until mid-2006.
-By Judith Burns, Dow Jones Newswires; 202-862-6692; Judith.Burns@dowjones.com
(END) Dow Jones Newswires
May 13, 2005 17:32 ET (21:32 GMT)- - 05 32 PM EDT 05-13-05
Pennies not a zero sum game as much as some zero game.
