On June 5, 2003, the Commission amended its rules under the Securities Exchange Act of 1934, pursuant to Section 404 of the Sarbanes-Oxley Act. The amendments require a company to include in annual reports a report by management on the company's internal control over financial reporting and an accompanying auditor's report. The auditing standard approved by the Commission applies to the auditor's involvement and report.
"We appreciate the PCAOB's diligence in undertaking such an important step in completing the agenda set forth by the Sarbanes-Oxley Act," said Alan Beller, Director of the Division of Corporation Finance. SEC Chief Accountant Donald T. Nicolaisen said, "The standard strikes an appropriate balance by providing sufficiently detailed guidance while, at the same time, allowing the auditor to exercise reasonable judgment. This standard is an important part of a much broader effort by all parties — issuers, auditors and regulators — to strengthen our system of financial reporting."
Various implementation questions were identified during the comment period, and implementation guidance will be provided shortly for the benefit of issuers and their auditors. Guidance will be forthcoming from both the SEC and PCAOB staffs. The guidance will address recent acquisitions, consolidated but non-controlled subsidiaries, and equity investees, as well as concerns raised by issuers surrounding qualification of the report on internal controls, transition periods, disclosure requirements relating to significant deficiencies and material changes made in internal controls, and the timing of assessment of internal control over financial reporting in relation to certain foreign subsidiaries.
Mr. Nicolaisen also said, "The management and auditor reports on internal control will impact companies of all sizes. We anticipate working with others in our continuing effort to address the concerns of smaller companies."
Auditing Standard No. 2 is effective for audits of companies with fiscal years ending on or after Nov. 15, 2004, for accelerated filers, or July 15, 2005, for other companies.
