The Securities and Exchange Commission conceded earlier this year that the provision [Section 404] wasn't working as intended. In May, it said it would rework the rule so that companies -- and their auditors -- aren't engaging in "overly conservative" audits and are instead focused on areas that present a risk to the company and its investors. The agency also said it hoped to tailor the rule to companies of all sizes, so that small businesses, in particular, weren't overburdened.
The SEC says it will unveil its changes next month. The agency, along with the Public Company Accounting Oversight Board, the auditing industry's overseer, said it will propose a revision to the auditing standard known as AS2 that auditors follow when testing management's assessment of company controls.
SEC Chairman Christopher Cox wrote to the oversight board this week, urging it to include in its changes some of the recommendations made by the SEC's small-business advisory group, including one that the auditing rule be adapted to companies based on their size. In his Nov. 6 letter, Mr. Cox said the SEC agreed that the standard needed to be focused on matters that are material, or relevant, to a company's financial results.
It isn't clear how far the SEC might be willing to go in making it easier and less costly for businesses to comply with Section 404. And some observers are skeptical that the problems can be fixed.
"This may be a bell that can't be un-rung," says Joe Grundfest, a former SEC commissioner and co-director of the Rock Center for Corporate Governance at Stanford University. "The audit firms have already incorporated a lot of the inefficient 404 process into their integrated audits, and once audit firms have processes in place, it's very hard to persuade them to back off and ease up on those processes."