S.E.C. To Ease Auditing Standards For Small Publicly Held Companies

WASHINGTON, Dec. 10 — The Securities and Exchange Commission will begin the process of easing auditing standards for thousands of smaller public companies this Wednesday when it proposes rules under the most contentious provision of the Sarbanes-Oxley Act.

Kate Phillips and The Timess politics staff are analyzing the midterm elections and looking ahead to 2008.

Mark W. Olson, chairman of the accounting oversight board.

The relaxed standards represent a compromise, giving a qualified victory for businesses, which had considered any regulation burdensome, and for the auditing firms, which had benefited from the imposition of stringent requirements on their clients.

Section 404 of the act requires publicly traded companies to assess the controls they have put in place to ensure that their financial reports are reliable. The rule, a response to the many accounting frauds that haunted investors before the legislation, was intended to try to discourage fraud and manipulation of financial statements.

But Congress left it to the regulators to determine precisely how thoroughly auditors had to examine financial controls, and the commission has repeatedly delayed imposing any rules on smaller companies until it considered their complaints and worked out details — a temporary exemption that benefited about four out of five of all public companies.

The commissions long-awaited interpretation of Section 404 is the culmination of a fierce lobbying battle. It has pitted the largest accounting firms, which have reaped huge profits from the tighter standards, against an equally influential coalition of small public companies, which has lobbied for years for relief.

The proposal will, for the first time, impose a materiality standard — that is, auditors will be advised to scrutinize only those controls that could have a reasonable risk of having a material impact on the financial statements. It is expected to encourage auditors to rely on prior years work as a basis for testing controls and discourage auditors from multiple testing of the same controls. And it will encourage the auditors to use a risk assessment to focus the audit on the areas of greatest potential concern.

Commission officials said last week that the proposal would not be an unequivocal victory for smaller companies because it would not give them what they wanted most: a blanket exemption from Section 404. Nor would it impose a sharp restriction that would limit the auditors to looking at the design of the financial controls.

But the officials said the proposal would address many of the cost concerns raised by small businesses.

It will squeeze out all the unnecessary cost, said a senior official who was central in drafting the rule and spoke on the condition of not being identified. What we really wanted was something that both tastes great and is less filling.

The commissions action is being coordinated with the Public Company Accounting Oversight Board, a sister agency that will be issuing the proposed new auditing standard under the same provision next week. The new standard will fill in many of the vital details for the companies and their accountants.

The fight over auditing standards has far broader political implications, according to officials, lawmakers and industry executives. An adequate resolution of the issue by regulators would take significant pressure off Congress to address other complaints from some business groups about the law and other corporate governance rules.

Since the Sarbanes-Oxley law was adopted, small businesses have maintained that it imposed unnecessary costs and burdens. The accounting firms, which have experienced a sharp increase in their billable hours as a result of the law, have praised the provisions, while groups representing institutional investors have sought to prevent the regulators from watering down the provision in ways that could lead to more accounting abuses.

Sarbanes-Oxley was fundamentally about a whole series of measures designed to make sure that the numbers that corporations put out are basically true, said Damon A. Silvers, who closely follows corporate governance issues as an associate general counsel at the labor union federation A.F.L.-C.I.O. The debate over Section 404 has been critical to ensuring that purpose in two respects: first, no one should be able to sell securities that do not have adequate internal controls, and second, whether the system of oversight over the auditing industry was going to work. It feels today as though we may be getting both of those things right.

Tag Cloud

External Information

Additional Information

Where Am I?