By Shelia Watson
Contributing Writer

At its open commission meeting the Securities and Exchange Commission voted 5-0 to make it easier for company executives to comply with the 2002 corporate accountability law Sarbanes-Oxley, also known as SOX.

SEC commissioners approved the guidance for management to use in evaluating internal controls over financial reporting. The move will allow executives to tailor their evaluations to the complexity of their businesses.

That’s the good news. The bad news is that it creates yet another accounting standard that CPAs and auditors must become familiar with.

“This ruling is much less proscriptive and it gives more flexibility, and the SEC will be issuing interpretive guidance on how to assess controls in order to make compliance,” said Walter McNairy, a CPA and auditor with Dixon Hughes who works exclusively with SEC accounting standards, including SOX.

The standard applies specifically to publicly held companies, but McNairy said the impact is already being felt with private companies. The American Institute of Certified Public

Accountants, which issues standards for privately held companies, has several auditing standards that deal with internal controls. However, he said the SOX guidelines, although designed for public companies, will almost certainly “trickle down” to the private companies.

“The AICPA has rewritten the auditing standards to focus more on auditing controls and more on risk,” he said. “At one time, the smaller private companies could ignore internal controls, but that’s no longer the case.

“The largest public companies were looking for guidance and what came out of Sarbanes-Oxley became the default,” he said. The problem was that the rules were so stringent that the smaller of the public companies found them to be too costly.

The Sarbanes-Oxley Act, signed into law July 30, 2002, introduced significant legislative changes to financial practice and corporate governance regulation. The Act also created the Public Company   Accounting Oversight Board.

Named after its main architects, Sen. Paul Sarbanes, D-Md., and Rep. Michael Oxley, R-Ohio, the legislation followed a series of high-profile scandals such as Enron and WorldCom.

Its stringent rules came with the stated objective “to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws.”

SOX requires company executives to assess at the end of each year the adequacy of internal controls over financial reporting, including policies, procedures or activities designed to minimize the chances of inaccuracies in financial reports. Such requirements, combined with a separate evaluation by outside auditors, have generated complaints that the rules are too costly and cumbersome.

The heart of the SEC’s recent vote removes the second audit option on management’s assessment and retains only one audit opinion directly with internal control.

According to the Small Business Administration, an estimated 60% of public companies are defined as small businesses. Those companies currently are exempt from complying because regulators delayed applying the rules until the regulations could be pared back.

The SEC guidelines are designed to be scalable to companies of all sizes to fit their specific circumstances. The SEC called the new guidelines a “safe harbor” and noted they are not intended to disrupt compliance best practices already in place, which means companies may continue to use existing procedures if they choose, provided they meet the standards.

However, many small businesses, and specifically the administrative body that oversees small businesses, do not agree.

The Small Business Administration’s Office of Advocacy requested an extension on the deadline for compliance for public firms with less than $75 million in market value. That request was denied.

While the issue becomes a political football in Washington, to CPAs working with small companies, the issue is more a game of endurance and stamina as the weight of additional standards are added.

“There are different sets of rules and levels of compliance, and it’s a challenge to stay aware of all the changes,” said Jennifer Lore, a CPA and auditor with Dixon Hughes who works primarily with nonprofit organizations. “The smaller companies will feel that they are bearing an unfair share of the burden of the Enron problems,” she said.

SUBSCRIBE | REPRINTS | CONTACT US

Phone: 843-849-3100    Fax: 843-849-3122