The Public Company Accounting Oversight Board today voted unanimously to propose for public comment a standard that would apply when auditors report on the elimination of a material weakness in a company's internal control over financial reporting. The proposed standard would establish a voluntary engagement that would be performed at the election of the company.
Section 404 of the Sarbanes-Oxley Act of 2002 requires public companies to annually provide the investing public with an assessment of the company’s internal control over financial reporting. The company’s independent auditor must attest to, and report on, management’s assessment. As companies have begun to include these reports in their annual financial statement filings, investors are receiving more information about the company’s financial reporting process than was available to them in the past.
In some cases, the company’s management and auditor agree that the company’s internal control over financial reporting is effective. In other cases, management’s assessment of the company’s internal control may reveal that the company has one or more material weaknesses - a serious defect in the company’s internal control over financial reporting.
When a company eliminates a material weakness, it may determine that disclosure is sufficient. Investors and companies, however, have called for the ability to bolster confidence in management’s assertions about those internal control improvements with the added assurance of the company’s independent auditor. The Board, therefore, proposed a standard for auditors to provide this assurance when, in the company’s judgment, such assurance would be appropriate.
The proposed standard would establish a stand-alone engagement that is entirely voluntary, performed only at the request of the company. Providing a specific standard governing such auditor reporting will facilitate implementation of the requirements of Section 404 of the Act and provide for additional assurance regarding the reliability of public company financial reporting.
The Board will seek comments on the proposed standard for 45 days and will carefully consider all comments received. Following the close of the comment period on May 16, 2005, the Board will determine whether to adopt a final standard, with or without amendments. Any final standard adopted will be submitted to the Securities and Exchange Commission for approval.
The archived webcast of the Board meeting can be found on the Board's Web site.