Contact: Melinda Loew
Deloitte
Manager, Media & Communications
+61 (0) 404 058 616

Contact: Dean Kingsley
Deloitte
Partner, Risk Advisory
+61 (0) 2 9322 7415

The US Public Company Accounting Oversight Board and SEC new guidance for compliance with Section 404 of Sarbanes-Oxley (SOX) regulations relaxes the responsibility of companies to report financial risk.

Deloitte Risk Advisory Partner Dean Kingsley said the changes will be welcomed by SOX-fatigued organisations and make compliance simpler for auditors and management.

“Although compliance will be less onerous, the changes will still present significant organisational challenges for the executive management to streamline their internal controls and reporting of financial risk.

“The key challenge for US-listed organisations and their subsidiaries will be to ensure there is consistency of data between management and auditor financial reports or there could be market confusion,” Mr Kingsley said.

The SEC introduced these changes to help public companies strengthen their internal control over financial reporting while reducing unnecessary costs, particularly at smaller companies
 
The Public Company Accounting Oversight Board, in a 5-0 vote, eased the standard for Section 404 of the Sarbanes-Oxley corporate reform law by making it more risk-based and less comprehensive, aiming to cut compliance costs by providing more flexibility.

The standard was imposed on corporate America by Congress in 2002 amid scandals, such as the collapse of Enron Corp., where investigators often found weak controls. Section 404 required companies to pay more attention to internal controls and to get their external auditors to review them.

The new simplified guidance requires company management to focus on the internal controls that best protect against the risk of a material financial misstatement.

“One of the key changes is that auditors are no longer required to sign off on management certification.

“But the simplifications of the financial reporting requirements could also prove to be a temptation for management to over-economise and there is no out for management now if they get it wrong. 

“The question for any organisation is how far to streamline internal controls and reporting mechanisms, without compromising the quality of data and information to the market,” Mr Kingsley said.

Mr Kingsley said while not many Australian companies were still listed in the US, around half of our top 200 organisations are subsidiaries and would need to look at these reporting requirements closely.

“The reality is that with the increasingly global market, any company wishing to access the US markets will need to comply with SOX and the new guidance,” he said.