PCAOB Adopts Temporary Rule Relating to Auditing Standard No. 2

The Public Company Accounting Oversight Board on Tuesday adopted a temporary transitional rule relating to PCAOB Auditing Standard No. 2, "An Audit of Internal Control over Financial Reporting Performed in Conjunction with an Audit of Financial Statements."

Section 404 of the Sarbanes-Oxley Act of 2002 and the related implementing rules of the Securities and Exchange Commission require certain companies to include in their annual reports filed with the Commission a report on management’s assessment of the effectiveness of those companies’ internal control over financial reporting. In addition, Section 404 requires these companies’ auditors to attest to and report on the internal control assessments made by management.

PCAOB Auditing Standard No. 2, which refers to the auditor’s attestation as an audit of internal control over financial reporting, is the standard the auditor must use to satisfy his or her obligation under Section 404.

The Commission, by order, has delayed the filing deadline for the first of these internal control reports for certain companies. Under the Commission’s order, accelerated filers with a market capitalization of less than $700 million and a fiscal year ending between and including November 15, 2004, and February 28, 2005, are provided an additional 45 days to file management’s first report on internal control over financial reporting and the related reports of their auditors, as long as those companies meet certain conditions.

To facilitate the objectives of the Commission’s order, the Board on Tuesday adopted a temporary transitional rule that will relieve auditors from two provisions of Auditing Standard No. 2 in connection with audits of companies that rely on the Commission’s order.

First, PCAOB Auditing Standard No. 2 provides that the auditor’s report on the financial statements and his or her report on internal control over financial reporting should be dated the same. The temporary rule would permit auditors to date their reports on management’s assessment of the effectiveness of internal control over financial reporting later than the date of their reports on the financial statements of companies relying on the Commission’s order.

Second, Auditing Standard No. 2 also provides that the auditor’s separate report on the financial statements should include a paragraph that refers to a separate report on internal control over financial reporting. The temporary rule waives this provision for auditors in connection with their audits of companies relying on the Commission’s order.

The temporary rule will be submitted to the Securities and Exchange Commission for approval, as required by the Sarbanes-Oxley Act. If approved, the temporary rule will take effect immediately. By the rule’s terms, it will expire on July 15, 2005.

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