June 8, 2005 -- Valuable lessons can be, and should be, learned from the first year of implementation of Section 404 of the Sarbanes-Oxley Act.  Through March 31, 2005 , approximately 2,500 companies have implemented and reported on the effectiveness of their internal controls over financial reporting. 

A few of the lessons to be learned are:

Setting the Scope:  Identify each significant process over each major class of transactions affecting significant accounts or groups of accounts.  In year one of Sarbanes-Oxley 404 compliance, management spent excessive time on insignificant controls and processes.

Timing and Scheduling:  Management should involve their auditors early on in the 404 process.  Documentation and testing should be done prior to year end to allow enough time for remediation of any deficiencies in controls.  Significant resources will be needed to complete the 404 process.

Documentation – Management documentation of internal controls was excessive in the first year.  Testing and documentation should only be performed on “key controls” over all relevant assertions.

Both the SEC and PCAOB have stressed the importance of establishing scope and involving the Company’s auditors early in the process, and although total relief from Section 404 has not been provided to non-accelerated filers, this is an opportunity for smaller cap public companies to learn from the experiences of their larger cap public company brethren.

For more information, contact Joe Beach at 215-564-1900 .

Back to News Archive