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Conference on Accountants’ Liability ALI-ABA. Zoe-Vonna Palmrose Deputy Chief Accountant Professional Practice Office of the Chief Accountant U.S. Securities and Exchange Commission May 4, 2007.

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Conference on accountants liability ali aba

Conference on Accountants’ LiabilityALI-ABA

Zoe-Vonna Palmrose

Deputy Chief Accountant

Professional Practice

Office of the Chief Accountant

U.S. Securities and Exchange Commission

May 4, 2007

The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission or of the author’s colleagues upon the staff of the Commission.


  • Introductory Remarks

  • Improving Sarbanes-Oxley Section 404 Implementation

    • Activities preceding the December 2006 proposals

    • ICFR reporting: Descriptive statistics

    • Brief overview of the SEC’s Proposed Interpretive Guidance For Management (December 2006)

    • Moving forward: Current ICFR activities and next-steps

  • Auditor Independence

  • Accounting Complexity Initiative

Improving the implementation of sox section 404 activities preceding the december 2006 proposals
Improving the Implementation of SOX Section 404:Activities Preceding the December 2006 Proposals

  • 2005 and 2006 Roundtables

  • Recommendations of SEC Advisory Committee on Smaller Public Companies (April 2006)

  • GAO Report (April 2006)

    • “Sarbanes-Oxley Act: Consideration of Key Principles Needed in Addressing Implementation for Smaller Public Companies”

  • Commission Announced Next Steps on SOX 404 Improvement (May 2006)

  • PCAOB Announced Four-Point Plan to Improve Implementation (May 2006)

  • COSO ICFR Guidance for Small Companies (July 2006)

    • Three Volumes (Executive Summary, Guidance, Evaluation Tools)

  • Extensions for SOX 404 Compliance

Icfr reporting results in year 3
ICFR: Reporting Results in Year 3

  • Year Three Filers

  • Approximately 2,838 filings

  • (Companies with year-ends after 11/14/06 and filed through 3/31/07)

    • 147 (5.2%) reported material weaknesses (i.e., ineffective ICFR)

      • Disproportionate number of smaller registrants (revenues below $500 million) had material weaknesses

      • 30% of registrants with ineffective ICFR were also ineffective during years 1 and 2

    • Comparison to Years 1 & 2

      • 10.6% reported ineffective ICFR in Year 2

      • 15.8% reported ineffective ICFR in Year 1

Ineffective icfr financial statement elements involved
Ineffective ICFR:Financial Statement Elements Involved

Sec s proposed interpretive guidance for management
SEC’s Proposed Interpretive Guidance for Management

Key Attributes of the Proposed Guidance:

  • Principles-based

  • Does not replace requirements of framework

  • Directs efforts to areas of highest risk of material misstatement to financial statements

  • Allows management to tailor the evaluation process to their facts and circumstances

  • Provides guidance on supporting the assessment

  • Provides framework for evaluating deficiencies

  • Non-exclusive safe harbor

Sec s and pcaob s proposed guidance auditor s icfr opinion
SEC’s and PCAOB’s Proposed Guidance: Auditor’s ICFR Opinion

PCAOB proposed standard

Removes the requirement to evaluate management’s process

Proposes one audit report on ICFR (not two)

SEC Proposed Amendments to Regulation S-X

Accountant’s ICFR Report

  • Proposal would require that auditor’s report express only one audit opinion (directly on the effectiveness of internal control over financial reporting)

Sec s proposed interpretive guidance for management overview
SEC’s Proposed Interpretive Guidance for Management: Overview

Phase 1

Involves identifying the financial reporting risks and the controls that adequately address these risks.

Phase 2

Involves evaluating the operating effectiveness of the controls identified in Phase 1, and determining the evidence needed to support the assessment, using evaluation procedures tailored to the risk assessment.

Phase 3

Involves reporting on the effectiveness of ICFR, including disclosing any material weaknesses identified during the evaluation process.

Compliance dates amendments adopted on december 15 2006
Compliance Dates (Amendments Adopted on December 15, 2006)

Sec s and pcaob s proposed guidance comment letters
SEC’s and PCAOB’s Proposed Guidance: Comment Letters

  • Comment period for both ended February 26, 2007

  • SEC (PCAOB) received over 200 (170) comment letters

  • Overarching themes covered by comment letters

    • Generally supportive of principles-based approach

    • Alignment of SEC and PCAOB proposals

      • Prescriptiveness

      • Terminology

Recent activities
Recent Activities

SEC Open Commission Meeting

  • Held on April 4, 2007 (4-04)

  • Provided a forum for Commission feedback to staff on the following areas of the PCAOB proposal:

    • Alignment between PCAOB and SEC proposals

    • Scaling the Audit

    • Auditor Ability to Use Judgment to Determine Amount of Testing

    • Using the Work of Others

Next steps on december proposals
Next Steps on December Proposals

  • Consideration of comment letters submitted to Commission and PCAOB

  • Finalization of proposed standards and guidance by PCAOB and SEC

  • Ongoing monitoring as standards and guidance are implemented

Addressing accounting complexity potential benefit to investors and other users
Addressing Accounting ComplexityPotential Benefit to Investors (and Other Users)

  • Refocus the reporting of transactions based upon their economic reality;

  • Lessen the ability to structure around accounting rules;

  • Lower the cost of financial reporting (especially for smaller entities); and

  • Result in accounting and reporting more easily understood by more investors, analysts, and others and not just the subject matter of accounting experts.