Potential Changes to Sarbanes-Oxley Section 404
By Jon Chism
Community Bank Advisor, 2007 Winter 

The Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB) held separate open meetings in December 2006 to discuss proposals related to Section 404 of the Sarbanes-Oxley Act (SOX 404). The proposed changes are intended to make compliance with SOX 404 more efficient and more effective based on experiences of the accelerated filers.

The SEC proposed guidance to assist management in evaluating internal control over financial reporting, while the PCAOB proposed a new auditing standard on internal control over financial reporting. Despite the changes that are in process, the deadlines for compliance with SOX 404 for non-accelerated filers have not been changed significantly. Currently, management’s report on internal control is required for years ending on or after December 15, 2007, and the auditor’s attestation report on internal control is required for years ending on or after December 15, 2008.

The proposed guidance from the SEC promotes an approach by which management should conduct a top-down, risk-based evaluation of internal control over financial reporting. The SEC believes the proposed guidance will assist companies of all sizes. The comment period for the SEC proposal ends February 27, 2007.

The PCAOB’s proposed changes include focusing the audit on matters that are most important to internal control over financial reporting and to processes and controls where financial misstatements are more likely to occur. One of the goals of the proposal is to scale the SOX 404 audit for smaller companies; it is expected that this can be accomplished by directing the auditor to tailor the audit to reflect the attributes of smaller, less complex companies and simplifying the requirements by reducing detail and specificity. The proposal also revises the definitions of significant deficiency and material weaknesses and addresses “strong indicators” of a material weakness. The comment period for the PCAOB proposal ends February 26, 2007.

It is anticipated further guidance will be released by the SEC and PCAOB on this topic over the next several months.