Sarbanes-Oxley

Public Company Accounting Oversight Board (PCAOB) announced for public comment on two auditing standards to supersede existing Auditing Standard No. 2 (AS2) on Internal Control over Financial Reporting (ICoFR), and other related proposals.  

• Direct the auditor to the most important controls and emphasize the importance of risk assessment;
  
• Revise the definitions of significant deficiency and material weakness, as well as the "strong indicators" of a material weakness;
  
• Clarify the role of materiality, including interim materiality, in the audit;
  
• Remove the requirement to evaluate management's process;
  
• Permit consideration of knowledge obtained during previous audits;
  
• Direct the auditor to tailor the audit to reflect the attributes of smaller and less complex companies;
  
• Refocus the multi-location testing requirements on risk rather than coverage; and
  
• Recalibrate the walkthrough requirement.

Proposed Auditing Standard - Considering and Using the Work of Others. Whose intent is:

• Allow the auditor to use the work of others, and not just internal audit, for both the internal control audit and the financial statement audit, eliminating a barrier to integration of the two audits;
  
• Encourage greater use of the work of others by requiring auditors to evaluate whether and how to use the work of others to reduce their testing;
  
• Require the auditor to understand the relevant activities of others and determine how the results of that work may affect the audit;
  
• Provide a single framework for using the work of others based on the auditor's evaluation of the combined competence and objectivity of others and the subject matter being tested; and
  
• Eliminate the principal evidence provision previously included in AS No. 2.

The second standard is 20 pages long and will help guide the internal financial, quality, and environmental auditors to provide audit evidence useful to the external auditor who is using the first standard, and thus reduce the overall cost of the SOX 404 audit.

Posted by John Walz at 08:20 AM | Permalink | Comments (0)

U.S. Security Exchange Commission (SEC) announced their proposed interpretation and rules for Management on their annual report on Internal Controls over Financial Reporting (ICoFR).  This 71 page, double-spaced report requires a “lawyer” review. The SEC interpretation covers:

A. The Evaluation Process

1. Identifying Financial Reporting Risks and Controls
2. Evaluating Evidence of the Operating Effectiveness of ICoFR
3. Multiple Location Considerations

B. Reporting Considerations

1. Evaluation of Control Deficiencies
2. Expression of Assessment of Effectiveness of ICoFR by Management and the Registered Public Accounting Firm
3. Disclosures about Material Weaknesses
4. Impact of a Restatement of Previously Issued Financial Statements on Management’s Report on ICoFR
5. Inability to Assess Certain Aspects of ICoFR

The proposed SEC Rule states that, although there are many different ways to conduct an evaluation of the effectiveness of ICoFR to meet the SOX rule, an evaluation conducted in accordance with the  (above) SEC interpretive guidance would satisfy the annual management evaluation required by those rules.

SEC requests and encourages any interested parties to submit comments on the proposed interpretive guidance by 26-Feb-07. I expect ASQ will contribute comments on behalf of its members.  As the proposed guidance and rule will make it easier for quality and environmental managers, engineering, and auditors to assist their management in assessing ICoFR.

Posted by John Walz at 01:34 PM | Permalink | Comments (0)

Public Company Accounting Oversight Board (PCAOB) has announced an open meeting via webcast for 9:30 a.m. Tuesday, December 19, to consider proposing for public comment a new auditing standard to supersede the Board’s existing auditing standard (Auditing Standard No. 2, AS2) on internal control over financial reporting (ICoFR), and other related proposals. PCAOB will consider changes to the auditing standard on ICoFR that provide for a much more efficient, risk-based, scalable implementation. The five goals are:

1. Focus the Internal Control Audit on the Most Important Matters
2. Eliminate Procedures that Are Unnecessary to Achieve the Intended Benefits
3. Incorporate Guidance on Efficiency
4. Provide Explicit and Practical Guidance on Scaling the Audit to Fit the Size and Complexity of the Company
5. A Simplified Standard

These same goals are also relevant and reasonable for quality and environmental auditors using ISO 19011.

Posted by John Walz at 08:44 AM | Permalink | Comments (0)

From NY Times 22-Nov-06, Senator Christopher J. Dodd said he was satisfied with Sarbanes-Oxley, which he played a significant role in drafting. He said he had not yet reached the same conclusions as the Bush administration and some Democrats that the law, combined with excessive litigation, had driven companies to issue stock in overseas markets instead of on Wall Street.  “I’m open to listening,” he said. “But if I get a sense that these new proposals are going to weaken transparency and stability and the competence in the system, then I’m going to be resistant.”

Another Sen. Dodd comment: “Sarbanes-Oxley had gone far to promote better corporate governance and transparency. I’ve always felt that the most important thing you have to worry about is investor confidence. I have no obligation whatsoever to guarantee that you’re going to make sure that you are going to make money on your investment. But I feel a very strong obligation that you didn’t lose it because the system broke down. That to me is going to be very important when I listen to these arguments.”

This author is in agreement with the Senator comments as I believe both SEC & PCAOB can revise their Rules and Guidance to influence companies and auditors behavior change towards the spirit of the SOX law.  From a company’s Operations point of view, who would not want better transparency and stability and the competence in the system.

Posted by John Walz at 11:57 AM | Permalink | Comments (0)