SEC Relaxes Section 404 Compliance Requirements

On Monday May 21, the SEC approved “right-sizing” measures to describe how corporate managers should comply with SOX expectations. The guidelines are the first significant change to SOX since its passing by the Bush Administration in 2002.

Compliance requirements, especially to Section 404 of SOX, is a time-consuming and costly endeavor for a public company; on average, approximately 15-percent of annual IT budgets have been spent on SOX compliance since 2004 – the article suggests that, on average, $2.9 million was spent in 2006 by companies seeking compliance; $91,000 for smaller public companies. Companies must implement strong policies and controls that govern the accuracy of the financial statements, then have an independent auditor attest to the effectiveness of their controls through certification.

The charge from business that motivated the change was that SOX created a huge competitive burden for US firms subject to the regulatory requirement, stiffled innovation, and SOX could be blamed as the principal motivator for companies to relocate to more unregulated markets.

The Public Company Accounting Oversight Board’s new auditing standard guidelines (AC-5) allow corporate managers to inspect areas where faults in the financial reporting process could likely be found instead of requiring the independent auditor to do the same thing. It scales Section 404 requirements to better fit the company’s size and complexity; it encourages auditors to use more independent judgment on risk assessment and Section 404 implementation; it will allow auditing fees to be capped or reduced as redundant analysis by the auditor would be eliminated.

IT staffing levels, auditing, and engineering responsibilities/spending for public organizations may be affected by the change.

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