Sarbanes Oxley Costs Being Addressed

Published by: Silicon Valley/San Jose Business Journal
Written by: Becky Wade Lindenberger
Date Published: January 5, 2007

Momentum is in the air to reform Sarbanes-Oxley. The blue-ribbon Capital Markets Regulation Committee has issued its first report. The PCAOB intends to replace Auditing Standard No. 2, the primary guidance for auditors performing an assessment of a company's internal controls. The SEC voted to issue interpretive guidance for management to implement Sarbanes-Oxley.

The ruling bodies haven't published final guidance, but all this activity seems to have at least one major aim: to provide relief to small businesses that have been hit hard by Sarbanes-Oxley.

The SEC appears to be leading in helping management be more efficient and cost-effective in internal assessment. Potential improvements include:

• You will not be required to document and test lower risk areas or you will document and test them on a rotational basis (i.e., every other year). In addition, you will only have to identify controls in a process that pose a reasonably possible risk to reliable financial reporting.
• The guidance will require better focus on materiality, such that you will not be required to document and test immaterial accounts.
• You will have more flexibility in how processes and controls are documented.
• The SEC will require auditors to increase their reliance on the work of independent third parties, which should reduce overall hours billed by the auditors. Consultants are usually cheaper than auditors.
• You should receive better guidance that will translate into more efficient internal assessments.
• The auditors should receive better guidance that will translate into more efficient audits.
• The SEC has delayed the implementation of the external assessment for non-accelerated filers (less than $75 million in public float) to 2008 to allow sufficient time for better standards and guidance to be published and absorbed.

Although the final guidance may not be available until late 2007, you can take steps now, including:

• Adopt more objective criteria for evaluating materiality such as that recommended by the Capital Markets Regulation Committee.
• Revamp your risk analysis to exclude processes that pose a less than reasonably possible risk that financial statements will be materially misstated.
• Re-evaluate key controls within each process and reduce them to those that truly ensure reliable financial reporting.
• Re-evaluate sample sizes to ensure you do not over sample.

Throughout this process, follow SEC and PCAOB announcements, and keep your auditors in the loop as you re-engineer your Sarbanes-Oxley process.