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August 9, 2007-- The Public Company Accounting Oversight Board (“PCAOB”) and the Securities and Exchange Commission (“SEC”) approved new guidance aimed at improving the effectiveness and efficiency of the assessments performed by a company’s management and its auditor of the effectiveness of internal control over financial reporting (“ICFR”) under Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”).  In July 2007, the SEC approved Auditing Standard No. 5, An Audit of Internal Control Over Financial Reporting That Is Integrated with an Audit of Financial Statements (“AS 5”), which supersedes Auditing Standard No. 2, An Audit of Internal Control Over Financial Reporting Performed in Conjunction with An Audit of Financial Statements (“AS 2”).  AS 5 is effective for fiscal years ending on or after November 15, 2007 with early adoption permitted.

In addition, on May 23, 2007, the SEC unanimously approved the issuance of interpretive guidance regarding management’s evaluation and assessment of ICFR.  The SEC approved the guidance as an interpretive release rather than a commission rule, which will permit companies with established and effective processes not to have to alter their procedures to align them with the new guidance, although they may choose to do so, and will also allow the SEC to more easily update or amend the guidance as needed.

The AS 5 guidance aligns certain key terms and concepts included in SEC interpretive guidance for management to avoid confusion and inefficiency between the two standards.  Some examples of the alignment of key terms and concepts between the SEC’s guidance and AS 5 include the definition of material weakness and related guidance for evaluating deficiencies, indicators of a material weakness, and use of the term “entity-level” rather than “company-level” controls.

The SEC has indicated that it does not anticipate a further extension of the Section 404 compliance dates for non-accelerated filers.  As it currently stands, management of non-accelerated filers will be required to perform an assessment of the effectiveness of ICFR for fiscal years ending on or after December 15, 2007, with the requirement for an auditor attestation becoming effective for years ending on or after December 15, 2008.

For a complete pdf summary of AS 5, click here.

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