Small companies will not be exempted, as some of them had hoped, from a post-Enron rule to bolster corporate financial controls, but standards underlying the rule will change, said U.S. regulators Wednesday.
Moving to back the rule mandated by Section 404 of 2002’s Sarbanes-Oxley reforms and respond to its critics, the U.S. Securities and Exchange Commission said it will issue better guidance to company managers on how to apply the rule.
A compliance deadline for small companies will be briefly postponed again, “although ultimately all public companies will be required to comply with the internal control reporting requirements of Section 404,” the SEC said.
The announcement defied an SEC advisory panel that said small companies should be exempted from Section 404. But, as expected, the SEC declined to take such a radical step.
“The steps we are announcing today are designed to further improve the reliability of financial statements and to better protect investors while making the Section 404 process more efficient,” said SEC Chairman Christopher Cox in a statement.
Section 404 is part of 2002’s Sarbanes-Oxley reforms, adopted by Congress amid a wave of business scandals. It requires U.S.-traded companies to disclose more about their internal controls, or how they keep their books in order.
It also requires the company’s outside auditor to say publicly whether the controls are adequate, adding a task to the auditor’s main job of reviewing a company’s books.
Large companies had to comply with Section 404 last year, but small companies did not. Amid complaints from them, the SEC has postponed implementing the rule for small companies.
The SEC said it will make another brief postponement, but that by the end of 2007, companies large and small not already complying with the rule will have to begin doing so, it said.
To respond to critics, the investor protection agency said the audit standard underlying the rule will be revised by the Public Company Accounting Oversight Board, a watchdog panel that polices corporate auditors and answers to the SEC.
PCAOB Acting Chairman Bill Gradison said the board’s revision of Auditing Standard No. 2 will seek to “ensure that auditors’ primary focus during an integrated audit is on areas that pose higher risk of fraud or material error.”
The PCAOB will also step up its focus on making sure the rule is applied in a cost-efficient way, Gradison said.