SEC on SOX

SEC Chairman Chris Cox

On December 13, 2006, the SEC approved three actions related to compliance with Sarbanes-Oxley Act Section 404 - Internal Controls:

1.  A proposal for public comment - Interpretive Guidance for Management regarding management's evaluation of internal control over financial reporting.  The Guidance addresses 4 areas:

• How management should discharge its responsibility to identify risks to reliable financial reporting and implement controls to address those risks.  The Guidance articulates a "materiality" standard and indicates that the controls described should be those that specifically address the risks identified -- not all possible contols.
• How management should evaluate the operating effectiveness of controls, emphasizing a flexible approach based on managerial judgment and the company's unique facts and circumstances.
• How management should report the results of the evaluation of internal controls.  The SEC provides a framework - "outside of the auditing literature" - for determining when material weaknesses exist -- with examples of "strong indicators that a material weakness exists".  The Guidance addresses reporting in special circumstances including restatements.
• What documentation is required, again emphasizing flexibility.

2.  Proposed Amendments to SEC Rules 13a-15 and 15d-15, making it clear that the requirement for an annual evaluation of internal control can be satisfied by performing an evaluation in accordance with the interpretive guidance;

3.  Proposed Amendments to Regulation S-X, clarifying the auditor's reporting requirement under SOX Section 404(b).  The idea behind the proposal is "more efficient, risk-based, scalable audits of internal control over financial reporting while retaining the important investor protection benefits."  Plain English interpretation: Making it easier for smaller companies!

The SEC is working with PCAOB to coordinate the auditor's reporting requirements and expects PCAOB to consider amending its Auditing Standard No. 2 to be consistent with the SEC's proposal.  The PCAOB's next meeting is Dec. 19, 2006. 

The text of these proposals is not yet available on the SEC website, but will be posted "as soon as possible" (the SEC's timetable, not mine).

Link to SEC Release 2006-206:  http://www.sec.gov/news/press/2006/2006-206.htm

(ag) Dec. 14, 2006, in SOX