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For public companies struggling with tough new auditing standards mandated by the Sarbanes-Oxley Act, help is on the way. Regulators from the Securities and Exchange Commission and the Public Company Accounting Oversight Board issued guidance Monday meant to ease compliance with �404 of the act, the part that has prompted the lion’s share of complaints about the law. Among other things, the PCAOB recommended that companies integrate audits of internal controls and client financial statements and allow auditors to use discretion rather than rely on what some have criticized as a “check-the-box” approach. PCAOB Chairman William McDonough said it is clear “the first round of internal control audits cost too much.” The SEC also said some of the cost of compliance “may have been unnecessary, due to excessive, duplicative or misfocused efforts” during the reviews. Section 404 requires public companies to evaluate the effectiveness of internal controls over financial reporting. Further, an external auditor must test these internal controls after the internal auditor has completed the financial statements. That requirement has prompted numerous complaints from companies who say the review process is onerous and imposed on auditors a “check-the-box” mentality that could force them to miss the big picture by focusing on insignificant items. The cost of the compliance, however, has been the biggest bone of contention. Large companies say they spend millions of dollars to comply with the new requirement, and smaller companies fear the costs will overwhelm them. McDonough said at a press briefing that Monday’s guidance is intended to clarify auditing standards and show that if they are applied correctly, costs should come down. “If the application of … Section 404 is done as cleverly, as selectively, as technically sound as possible, costs should be lower,” he said. McDonough also said that the audits done during the first year after the rules took effect were not done in the most efficient way. “We’re trying to improve this,” he said. Among several refinements announced Monday, the board recommended that the audits of internal controls be integrated with audits of client financial statements, so that evidence gathered in either audit can contribute to the completion of both. The board also recommended that auditors use their discretion, not just a checklist approach, to tailor their work to individual clients. A “check-the-box approach that treats all controls equally is less likely to improve internal controls and financial reporting than reasoned good-faith exercise of professional judgment,” a PCAOB statement said. The PCAOB guidance also advises auditors to use a risk-based approach to eliminate accounts that have only a remote likelihood of containing a material misstatement. In addition, it acknowledged that the scope of some reviews may not require regular or annual testing. “I think this will help,” said Marie Lee, tax counsel for the American Electronics Association, a Washington based trade association representing the technology industry. She said the PCAOB guidance “goes directly to the “primary concerns” that the organization raised during its meetings with the board over the past several months.” Lee noted that the guidance also encourages more direct and timely communication between auditors and their clients. “Auditors are afraid to talk to their clients for fear they will be in violation of PCAOB’s independence rules,” she said. “This guidance should provide some comfort.” The board is also encouraging outside auditors to take advantage of other sources, including the work of internal auditors. “The auditing standard allows significant flexibility to use the work of others,” McDonough said. While the new guidance appears to appease some critics of the law, the American Enterprise Institute said Monday that sometime in the future an independent body within the government, such as the Government Accountability Office, or an appropriate private-sector body should be directed by Congress to undertake an evaluation of the costs and benefits of the regulation. Meanwhile, the SEC and the PCAOB said they would continue to monitor implementation of Sarbanes-Oxley, especially for smaller public companies and foreign issuers. McDonough said he feels there is no need for congressional action on the law now, but “sometime in the future tuning of the Act may be needed.” Copyright �2005 TDD, LLC. All rights reserved.

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