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Recently, the PCAOB Staff issued updated guidance regarding the audit of internal control over financial reporting for smaller, less complex companies. The purpose of this Staff guidance is to assist auditors in applying the PCAOB’s Auditing Standard No. 5, An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements, to audits of smaller companies.

Guidance along these lines was released on a preliminary basis back in October 2007, at which time the Staff solicited comments. After considering the 23 comment letters received, the Staff has now finalized the guidance. The revisions to the preliminary guidance, which are discussed in detail in Appendix B to the document, are principally clarifications rather than a revisiting of the fundamental principles underlying the preliminary Staff views.

The topics covered in the PCAOB Staff Guidance include:

– Scaling the Audit for Smaller, Less Complex Companies
– Evaluating Entity-Level Controls
– Assessing the Risk of Management Override and Evaluating Mitigating Actions
– Evaluating Segregation of Duties and Alternative Controls
– Auditing Information Technology Controls in a Less Complex Information Technology Environment
– Considering Financial Reporting Competencies and Their Effects on Internal Control
– Obtaining Sufficient Competent Evidence When the Company Has Less Formal Documentation
– Auditing Smaller, Less Complex Companies with Pervasive Control Deficiencies

While the PCAOB Staff guidance is obviously geared toward auditors, smaller companies should take the guidance into account in the course of evaluating their controls, because the new guidance will certainly have an influence on how auditors view their internal control over financial reporting.

More internal control guidance is on the way – COSO has announced that it will release its four volume set of guidance on monitoring internal controls tomorrow. This guidance develops the monitoring component of Internal Control – Integrated Framework, in order to help companies “ensure the effectiveness of their financial, operational, and compliance-related internal controls.” COSO has already released the Introduction to this guidance in order to build the “buzz” around this new release!

The Fight Goes On: The Sarbanes-Oxley Act and the PCAOB

As noted earlier this month in the SCOTUS Blog, the fight over the validity of the PCAOB has now made it to the Supreme Court. The Free Enterprise Fund and Beckstead and Watts, LLP have filed this petition for writ of certiorari, arguing that the high court should consider the separation of powers issues raised in their dispute. As Broc noted in the blog last summer, the DC Circuit Court of Appeals upheld – by a 2-1 vote – the constitutionality of the PCAOB. Much remains at stake with the challenge, given the Sarbanes-Oxley Act’s lack of a severance clause.

Snowball: The Gathering Executive Pay Reform Efforts

Things are undoubtedly moving quickly on the pay reform front. Mark Borges noted yesterday in his Compensation Disclosure Blog:

“Hardly a day (or even an event) goes by anymore without some new revelation about corporate excess. (See this story about profligate spending by TARP participants at the Super Bowl.)

Today (Monday, February 2nd), The Wall Street Journal is reporting that the Obama Administration is expected to announce this week tougher executive pay standards for some of the companies receiving government aid (see “Treasury to Outline Bank Plan Next Week“). While the details are still sketchy, the standards are likely to ban companies receiving “exceptional” aid from making any severance payments. In addition, bonus pools for their top 50 executives will be scaled back by at least 40%. (Interestingly, the cut back would be based on 2007, rather than 2008, levels, resulting in a steeper drop than would be the case if more current figures were used). We’ll have to wait and see if the proposals actually mirror these rumored provisions, and what qualifies as “exceptional” aid.

Things are a lot less fuzzy in Congress, where, on Friday, Senator Claire McCaskill introduced legislation that would limit the total compensation of executives at firms receiving government funds to no more than the salary of the President. The Cap Executive Officer Pay Act of 2009 provides that no employee of any private company that accepts federal funds because of the economic downturn would be able to make more than the President (approximately $400,000) until the company is self-reliant again. For these purposes, “compensation” would include salary, bonuses, and stock options.

Wow – and it’s only Monday”

If you would like to check out more of Mark’s blog in these critical times for executive compensation issues, consider a no-risk trial for CompensationStandards.com or renew your subscription today.

– Dave Lynn