Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Wednesday, May 23, 2007

Opening Remarks from SEC Open Meeting on Internal Controls

Excerpts from Statement by SEC Staff: SEC's Proposed Interpretive Guidance to Management for Section 404 of Sarbanes-Oxley Act, by Zoe-Vonna Palmrose, Deputy Chief Accountant, U.S. Securities and Exchange Commission, SEC Open Meeting, Washington, D.C., May 23, 2007:

The Commission's proposed interpretive guidance was centered around two broad principles. These principles have not changed in the guidance we are presenting today. The first principle is that management should evaluate whether it has implemented controls that adequately address the risk that a material misstatement in the financial statements would not be prevented or detected in a timely manner. The second principle is that management's evaluation of evidence about the operation of its controls should be based on its assessment of risk. Under the guidance, management can align the nature and extent of its evaluation procedures with those areas of financial reporting that pose the highest risks to reliable financial reporting (that is, whether the financial statements are materially accurate). As a result, management may be able to use more efficient approaches to gathering evidence, such as self-assessments, in low-risk areas and perform more extensive testing in high-risk areas. By following these two principles, we believe companies of all sizes and complexities will be able to implement our rules effectively and efficiently....

Nonetheless, based on the comments received, we did make modifications to the proposed interpretive guidance in a number of areas. For example, we made revisions to better align it with the PCAOB's proposed auditing standard, to provide clarification on the role of entity-level controls, as well as on the nature of on-going monitoring activities in relation to management's evaluation, and to enhance the guidance on fraud risk considerations.

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