Securities and Exchange Commission (SEC) Chairman Christopher Cox and the Public Accounting Oversight Board’s (PCAOB) Chairman Mark Olson were reported to be planning to meet, possibly as early as Sunday, to discuss differences in their approaches to revising Section 404 of the Sarbanes-Oxley Act (SOX), Reuters reports. Early in November the PCAOB sent a draft audit revision to the SEC that did not win SEC approval because it did not meet the concerns of small businesses, unnamed sources told Reuters. Then portions of a letter written by Chairman Cox to Chairman Olson were made public on November 6, but according to Cox, some of the language was flatly inaccurate or had already been “overtaken by events”, the Washington Post reports.
“There will be an audit for everybody, which is a major decision we took,” Mr. Cox said in an interview reported by the New York Times, adding that the nature of the audit could change. “It’s supposed to be risk-based, so that the auditor’s time is focused on the areas of greatest risk.”
Mr. Cox said that his goal was to smooth the way for the PCAOB to propose a new auditing standard that the SEC would approve by next spring, the Times reports. He said that the SEC would propose new rules to provide guidance to companies on how to evaluate internal controls and that it was likely to accept the size categories proposed by the small business advisory committee last May.
In order to meet Cox’s goal, the SEC and PCAOB will have to present draft proposals to the SEC’s mid-December open meetings. Barney Frank (D-Mass.), expected to be the next chairman of the House Financial Services Committee, and Senate Banking committee member Charles Schumer (D – NY), have asked the regulators to suggest ways to bring down the costs of Sarbanes-Oxley compliance, the Washington Post reports.
How far the SEC will go is not clear, the Wall Street Journal says. “This may be a bell that can’t be unrung,” says Joe Grundfest, a former SEC commissioner and co-director of the Rock Center for Corporate Governance at Stanford University. “The audit firms have already incorporated a lot of the inefficient 404 process into their integrated audits, and once audit firms have processes in place, it’s very hard to persuade them to back off and ease up on those processes,” he said, according to the Journal.
PCAOB chairman Olson told Reuters that 404 costs had not declined as much as he hoped. But Cox told the Times, “I am very concerned that no matter what we do in this audit standard, we will not have much impact on audit fees. But it is our intention to do so, in a way that gives investors more bang for the buck.”
Audit fees rose by 63 percent from 2002 to 2004, according to a study by Jack Ciesielski, editor of the Analyst’s Accounting Observer newsletter, the Journal says, from $2.5 billion in 2002, to $4 billion in 2004. Much of the increase was due to 404, Ciesielski says, but he thinks it is a positive development and suggests that audits have gotten better. “You never hear investors complain about the size of audit fees," he said. “But you will hear them complain about shoddy [financial reporting.]”
SOX 404 has also been blamed for the large number of IPOs being done in London, Hong Kong, and elsewhere, in recent years. Only three out of 20 have been done in the U.S. so far this year, compared with nine out of 20 in 2002. The SEC recently proposed that newly public U.S. companies and companies based outside the U.S. should be given more time to comply with Section 404.
In a separate matter, the PCAOB has not released any inspection reports on any of the Big Four audit firms. By this time last year the PCAOB had issued two reports, with the remaining two finished by November 15, the Wall Street Journal says.