May 23, 2005

All Corp Fin Staff Now Nestled in Station Place

On Friday, the last of the Corp Fin staff moved to the new DC headquarters – and our “SEC Staff Organization Chart” has been updated with all the new phone numbers.

Other staffers will be continuing to make the move over the next few months. As of now, all hard copy submissions continue to get sent to the old HQ address, 450 5th St.

Six Messages from Last Week’s Internal Controls Guidance

Finally got a chance to focus on last week’s batch of internal controls guidance from the SEC and PCAOB. Here are the top six messages I gleaned from them:

1. Its okay to talk again! – Management and outside auditors can resume their dialogue concerning accounting and internal control questions. For example, the sharing of draft financial statements that may be incomplete or contain errors do not contravene the applicable independence or auditing rules and standards. As I am sure outside auditors will be quick to remind you, management must always make the final call on reporting decisions.

2. “Reasonable Assurance” does not mean absolute assurance – SEC reiterates a sentence from the Staff statement when it notes that “[r]egistered public accounting firms should recognize that there is a zone of reasonable conduct by companies that should be recognized as acceptable in the implementation of Section 404.”

3. Its top down; not bottom-up – The agencies clarified that a top-down approach should be used, by beginning with company-level controls.

4. No need to control everything – After starting with the top, companies should then drill down to identify and test other accounts and processes that are relevant to internal control over financial reporting. No more controls to count paper clips – and this is particularly help for IT systems as only IT processes that impact financial data need to be covered by internal controls. The bottom line is that there is no need to use a checklist.

5. No need to test everything every year – The agencies want companies to focus on the areas of greatest risk to the integrity of their financial reporting. The testing and assessment of controls related to these areas of greatest risk may, and in most cases preferably would, take place throughout a fiscal year rather than just the period surrounding the year end close, and everything doesn’t have to be kicked each year.

6. Restatements are not necessarily material weaknesses – Of course, in most cases restatements will be material weaknesses, but I have heard of quite a few instances in which there were strong arguments that a restatement did not rise to the material weakness level.

Material Weakness Disclosures Exceed 14%!

As I heard last week at a conference – and the reinforced in this article – a total of more than 14% of large public companies will have disclosed material weaknesses in this proxy season’s batch of 10-Ks when all is said and done. states that among 2,963 accelerated filers that disclosed their Section 404 opinions as of May 15th, 12%, or 363, disclosed material weakness – and then taking into account expected material weakness disclosures from non-timely filers and those that relied on the SEC’s exemptive order – that percentage is predicted to exceed 14%. In comparison, at the SEC’s 404 Roundtable last month, speakers were saying they expected 8% of companies to disclose material weaknesses, just about half of what actually transpired.