(The news featured below is a selection from the news covered in Federal Securities Law Reporter, which is distributed to subscribers of Federal Securities Law Reporter.)

Oxley, SEC Accountants Address SEC and PCAOB Developments

Rep. Michael Oxley, in a keynote address at the American Institute of Certified Public Accountants conference on SEC and Public Company Accounting Oversight Board developments, said that he does not believe that the problems associated with Sarbanes-Oxley Act Section 404 stem from the legislation, but from its overzealous implementation. SEC Chairman Christopher Cox and PCAOB Chairman Mark Olson want to make this provision work, according to Rep. Oxley, and in his view, the changes they plan to propose by the end of the year will provide more certainty and lower costs.

The SEC's chief accountant, Conrad Hewitt said that he has collaborated daily with the PCAOB on proposed revisions to Auditing Standard No. 2 since his arrival at the Commission in August 2006. This close collaboration will ensure that there are no surprises, he said. The Office of the Chief Accountant is working on a three-year plan, he said. Among its top priorities is to address the complexity of accounting standards.

Deputy Chief Accountant Zoe-Vonna Palmrose spoke about the need to improve audit effectiveness. For public companies, audit effectiveness should be viewed from the perspective of an integrated audit of both the financial statements and internal control over financial reporting. She said there are "sufficient dials" that can be adjusted on internal controls over financial reporting to calibrate the standards and performance and she has worked closely with the PCAOB on Section 404.

The SEC's plan to issue guidance for management will be principles-based, according to Ms. Palmrose. The use of reasoned judgments should restore common sense to the Section 404 process, in her view. No one is well served by clearly excessive work or unreasonable efforts, she said.

Ms. Palmrose noted that the excessive costs of implementing Section 404 created pressures on the PCAOB to use its inspection process to assess the efficiency of internal control audits. She agreed that inspections can serve as a useful source of feedback for improving auditor performance and standards, but they were not intended for that purpose. The inspections are intended to assess compliance by public accounting firms with the rules and professional standards in the conduct of their audits. She believes that investors are best served if regulators focus on audit effectiveness.

Ms. Palmrose also raised concerns about the pressure on audit committees to reduce Section 404 audit fees by cutting back on what they may see as unnecessary efforts. Section 404 must be fixed so that audit committees do not cut back on the scope of the audit in important and legitimate areas, she said. The chief accountant and she supports a system based on the foundation of a strong audit firm quality controls.

Ms. Palmrose reported that the SEC is surveying the landscape of auditor independence standards in jurisdictions throughout the world. As different models have evolved, the independence rules can pose challenges for audit firms with multinational clients. The SEC wants to understand the similarities and differences so that it can engage with other regulators going forward. This is one of many public policy challenges, she said, but the goal remains the improvement of audit effectiveness.

Deputy Chief Accountant Scott Taub said the most frustrating issue during his time at the Commission has been the application of professional judgment. Accountants are hesitant to use judgment out of concern over being second-guessed, he said. Mr. Taub said he would try one last time to convince registrants that following the existing rules is not inconsistent with the use of professional judgment. There are many bright line rules and they should not be ignored.

There are many places in the accounting literature that call for the consideration of subjective factors, he said, such as whether an impairment of assets is other than temporary. He warned against using twisted analogies to make a standard fit. As for charges that the SEC staff second-guesses professional judgments, he urged parties to let the staff know and more senior people can get involved. The staff agrees with registrants' accounting much more of the time when it discloses how it reached its position, he said. Registrants hear from the SEC when the staff disagrees, he added, but not in the more common cases in which it agrees.