FEI Comments on Proposed SOX Changes

In separate letters submitted to the Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB), Financial Executives International’s (FEI) Committee on Corporate Reporting (CCR) and Small Public Company Task Force (SPCTF), voiced concerns with recent changes proposed by the SEC and PCAOB to Section 404 of Sarbanes-Oxley.

The letters, which come in conjunction with today’s comment deadline on proposed auditing standards and management guidance by the SEC and PCAOB, emphasize the importance of alignment between both agencies. Through the letters, the FEI committees also suggest additional clarifications and enhancements to the proposed guidance.

“FEI supports the recent efforts of the SEC and the PCAOB in proposing management guidance and a new audit standard, respectively, for implementing Section 404 internal control requirements,” commented Michael P. Cangemi, President and CEO of FEI. “Though we appreciate the thought and effort put forth by both agencies, we feel that the proposed PCAOB standards, although improved from the existing PCAOB Audit Standard No. 2, are still more detailed and prescriptive than the proposed SEC guidance.

We strongly believe that these differences will result in external audits that are more conservative than management assessments, causing companies to incur unnecessary costs to remain aligned with their external auditors.”

Principal comments found in FEI’s CCR and SPCTF letters include:

  • The committees support the risk-based top down approach to implementation proposed by both agencies.

  • The committees believe that the proposed management guidance allows for a high level of judgment in applying the principles to individual company situations, moving away from the one-size-fits-all approach that many companies and their external auditors have been following.

Critical concerns:

  • Management guidance and external audit standards must be aligned.

  • For companies to implement the proposed guidance successfully in alignment with their external auditors, the auditors must be assured that the inspection practices of the PCAOB will align with the proposed auditing standards.
  • If the auditors do not receive that assurance, they will be reluctant to change their approach until after inspection cycle (more than a year from the time of audit).

  • If auditors do not change their approach, companies will continue to incur unnecessary costs and fail to achieve the objective of more efficient and effective assessments.

Suggestions for clarifications or enhancements to proposed guidance itself:

  • Focus on change in controls for testing, allowing for rotational testing of controls that have operated effectively in the past and have not changed.

  • Increased reliance on entity-level controls to reduce process-level testing.

  • Elimination of the “interim” financial statement component from the definition of material weakness.

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