May 18, 2006

The SEC’s and PCAOB’sFour-Point Plan on Internal Controls

Yesterday, the SEC and PCAOB announced a four-point plan to tackle Section 404 issues. The big news is that the SEC will not exempt small companies from Section 404, which really is not much of a surprise given comments from some of the Commissioners leading up to the Advisory Committee’s report. The Plan consists of:

1. Guidance for Companies – including issuing a Concept Release covering a variety of issues (such as the management assessment process and the appropriate role of outside auditors in connection with the management assessment and on the manner in which outside auditors provide the attestation required by Section 404(b)); consideration of additional guidance from COSO; and guidance to management to assist in its performance of a top-down, risk-based assessment of internal control over financial reporting (timing and form of this guidance not yet determined)

2. Revisions to Auditing Standard No. 2 – the PCAOB announced yesterday that it intends to propose revisions to its Auditing Standard No. 2, which overall would:

– Seek to ensure that auditors focus during integrated audits on areas that pose higher risk of fraud or material error;

– Incorporate key concepts contained in the guidance issued by the PCAOB on May 16, 2005; and

– Revisit and clarify what, if any, role the auditor should play in evaluating the company’s process of assessing internal control effectiveness.

3. SEC Oversight of PCAOB Inspection Program – the PCAOB will focus its 2006 inspections on whether auditors have achieved cost-saving efficiencies in the audits they have performed under AS No. 2, and on whether auditors have followed the guidance that the PCAOB issued in May and November 2005.

4. Extension of Compliance for Non-Accelerated Filers – the SEC expects to announce another short postponement of the effective date – five months according to this WSJ article – for the rules implementing Section 404 for non-accelerated filers (but will still require filers to comply with the Section 404(a) management assessment required for fiscal years beginning on or after December 16, 2006).

Introducing the COMPETE Act

Some in Congress still want smaller businesses exempt from Section 404. Yesterday, Senator Jim DeMint (R-SC) and House Representative Tom Feeney (R-FL) led a group of other supporters to introduce legislation entitled the “Competitive and Open Markets that Protect and Enhance the Treatment of Entrepreneurs [COMPETE] Act.” Here is a related press release.

According a copy of the bill posted on, it is designed “to reduce the burdens of implementation of Section 404 of the Sarbanes-Oxley Act…” by creating an exemption for small companies, recommending “random” rather than annual internal control audits, creating a “de minimis” standard for materiality of 5% of net profits, recommends SEC and PCAOB issue guidance for measuring the terms “reasonable,” “significant” and “sufficient,” defining other terms, and that SEC/PCAOB conduct a study to compare and contrast the U.K.’s “Turnbull” guidance vs. the implementation of Section 404, and submit the results of that study to Congress within one year of the date of enactment of the COMPETE Act. Thanks to FEI’s “Section 404″ Blog for the heads up and language above.

According to this WSJ article, the bill is unlikely to get before Congress for a vote this year.

What the Top Compensation Consultants Are NOW Telling Compensation Committees!

We have posted the transcript from the popular webcast: “What the Top Compensation Consultants Are NOW Telling Compensation Committees!”

2nd Annual “M&A Nuggets” Webcast

We have posted the transcript from the popular webcast: “2nd Annual “M&A Nuggets.”