Securities Enforcement, Financial Services, and Finance
On May 16, 2005, the Securities and Exchange Commission ("SEC") issued a press release announcing that the staff (the "Staff") of the Division of Corporation Finance, together with the Office of the Chief Accountant, had issued a Staff Statement on Management’s Report on Internal Control Over Financial Reporting (the "Staff Statement"). On the same day, the Public Company Accounting Oversight Board (the "PCAOB") issued a press release and issued guidance in the form of a Board Policy Statement and FAQ (the "Guidance") directed to independent accounting firms. The Staff Statement and the Guidance provide interpretive advice and guidance to public companies and their auditors encouraging more flexibility by auditors, and their company clients, in implementing Section 404 of the Sarbanes Oxley Act of 2002 ("SOX") in order to reduce company costs.
PCAOB Chairman William J. McDonough stated, "It is clear to us that the internal control assessment and audit process has the potential to significantly improve the quality and reliability of financial reporting. At the same time, it is equally clear to us that the first round of internal control audits cost too much." Chairman McDonough also said, "[t]hrough the guidance we issue today, as well as our upcoming inspections, we are committed to seeing that AS No. 2 is implemented in a manner that captures the benefits of the process without unnecessary and unsustainable costs." The Staff Statement indicated that "[m]anagement should not allow the goal and purpose of the internal control over financial reporting provisions - the production of reliable financial statements - to be overshadowed by the process."
In particular, the Staff Statement and the Guidance provided relief in the following areas of recent tension between companies and their auditing firms:
Both the SEC and the PCAOB indicate that they will continue to monitor and evaluate developments in the implementation of Section 404 with a view to improving and lowering the cost of the process.
For further information, you may contact Eric Roberts, the Head of Morrison & Foerster’s Forensic Accounting Group, or any of the other corporate partners in our worldwide offices.
 While a "staff statement" provides the views of the Staff, and has not been officially approved by the Commission itself, it is generally regarded as an authoritative pronouncement.
 According to the Staff Statement, "The scope and process of the assessment should be reasonable, and the assessment (including testing) should be supported by a reasonable level of evidential matter."
 For instance, rather than testing all of the detail controls relating to the cash disbursement process, management and auditors should first consider company-level controls, which might include centralized processing of accounts payable, the recent or planned review of the disbursement function by internal audit, detailed budgetary reviews, and a financial reporting process that historically has not revealed any end of period accounting errors. The review of company-level controls will assist managements and auditors in distinguishing the accounts and processes that have a significant impact on the financial statements from those that do not. Throughout this evaluation process, managements and auditors should conduct risk assessments to determine the appropriate level of detail testing for the significant controls over the cash disbursement function.
 For example, the overall control to provide financial statement assurance for accounts payable may consist of a number of steps, such as approvals, authorizations, verifications, reconciliations, and reviews. The Staff suggests that it may not be necessary to conduct detailed testing of all of the constituent items, but instead test the effectiveness of a combination of steps.
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