May 17, 2005
Section 404 of SOX
The SEC, in coordination with the PCAOB, attempted to rein in auditors yesterday. This is worth a chuckle.
Congress passed Section 404 of the Sarbanes-Oxley Act of 2002 that requires auditors to check company’s internal controls on financial reporting. This year publicly traded companies had to comply. The open ended mandate of Section 404 has auditing companies telling clients to implement a flood of technical procedures. Companies, afraid of the draconic penalties in the Act for failure to comply and unaware of what compliance is, must listen to their accountants. It is recipe for robbery. (Firms prepare "Perspectives on Internal Control Reporting") The bills, paid to auditors and accountants, have been huge. Revenue at accounting firms (and partners draws) are up.
Now the SEC is rebuking auditors for an overly technical approach to the rule. What did they expect? Auditors are literal and technical by trade; they will put in technical procedures to give meaning to vague definitions. Vague definitions in financial rules, based by draconian sanctions, will generate reams of technical compliance procedures as companies and their accountants attempt to limit their exposure.
The SEC’s only practical response is to itself create directions on appropriate procedures, which, of course, will enmesh the SEC in the details of proper accounting practices. Wonderful.
May 17, 2005 | Permalink
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