PCAOB approved auditing standard

10 March 2004

The Public Company Accounting Oversight Board (PCAOB) approved an auditing standard for audits of internal control over financial reporting and proposed amendments to the Board’s existing interim auditing standards to conform them to the new standard. It also formally extended by three months the date when their oversight of non-US auditors begins. The original deadline to register with it was mid-April. That date is now mid-July, as efforts continue to smooth relations between the PCAOB and European regulators over extra-territorial reach.

Section 404(a) of the Sarbanes-Oxley Act of 2002, and the Securities and Exchange Commission's related implementing rules, requires the management of a public company to assess the effectiveness of the company's internal control over financial reporting. Section 404(b) of the Act, as well as Section 103, directed the PCAOB to establish professional standards governing the independent auditor's attestation, and reporting, on management's assessment of the effectiveness of internal control.

The final rule does away with the former broad interpretation of internal controls subject to mostly negative reactions from affected companies, and replaces it with “internal controls over financial reporting”. While this change may seem minor, experts say that its impact is major. “Financial controls are just a subset of internal controls,” he says. “It is a less aggressive interpretation of the law.”

According to Larry Noble, executive director of the Centre for Responsive Politics, seven of the top 10 contributors to President Bush’s current re-election campaign are financial services companies, precisely the constituency that would be most immediately and negatively affected by rigorous enforcement.

The European Commission is expected to publish its proposal on auditing and accounting next Tuesday

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Article by Ben Worthen

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