Sarbanes-Oxley 404
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Sarbanes-Oxley is definitely a hot item at the moment. And the hottest part is Section 404. This requires auditors of public companies attest to the quality of the internal controls. The company itself is mandated to provide a report on its controls in the Annual Report. Additionally provide an assessment of the effectiveness of those controls. a. Rules Required. The Commission shall prescribe rules requiring each annual report required by section 13(a) or 15(d) of the Securities Exchange Act of 1934 to contain an internal control report, which shall-- 1. state the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting; and 2. contain an assessment, as of the end of the most recent fiscal year of the issuer, of the effectiveness of the internal control structure and procedures of the issuer for financial reporting. b. Internal Control Evaluation and Reporting. With respect to the internal control assessment required by subsection (a), each registered public accounting firm that prepares or issues the audit report for the issuer shall attest to, and report on, the assessment made by the management of the issuer. An attestation made under this subsection shall be made in accordance with standards for attestation engagements issued or adopted by the Board. Any such attestation shall not be the subject of a separate engagement. The requirements listed by Section are onerous and new. This level of disclosure over matters, previously kept closed are expensive. There are a number of points to note. Both the company and the auditor are required to make a statement. The company to state the responsibility for establishing and maintaining the internal control structure. Over and above acknowledging managements responsibility the company has to assess the effectiveness of the internal controls. A company may have many internal controls relating to its business, for example product quality. However Sarbanes-Oxley only refers to internal controls relating to financial reporting. The section only mandates the statement and attesation to appear only in the annual report. Quarterly results do not require a statement. Section 302 relates to "disclosure controls and procedures." These do have to be included quarterly. That however is the subject of another article. The attestation by the auditor must be in accordance with standards laid down by the PCAOB.
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