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Alamo Group Asks Congress to Halt PCAOB Internal Control Standard

Alamo Group has asked Congress to prevent the PCAOB from adopting its proposed internal control audit standard that is intended to replace Auditing Standard No. 2 and to consider amending the Sarbanes-Oxley Act to limit the requirements imposed on public accounting firms. The PCAOB's proposal and the SEC's proposed guidance for management continue to require a full blown external audit of internal control, according to Alamo, although it is not required by Sarbanes-Oxley Act section 404. This approach has been rejected by a number of international jurisdictions and should be subject to a full debate in the U.S., in Alamo's view. Alamo, a manufacturer of vegetation maintenance equipment, is an accelerated filer and has been subject to the internal control requirement for the past three years.

Alamo said the external audit of internal control has contributed to huge audit fees and may be affecting U.S. global competitiveness. The company believes that SOX should be amended to make clear that the maintenance of a system of internal control, the assessment of internal controls and the reporting on that assessment is a management function. The PCAOB's revised standard merely redefines and redirects how auditors should perform the audit of internal control without addressing the need for this service, according to Alamo. The company suggested that the PCAOB lacks innovative thinking and is unwilling to take the bold action that is needed to address the problems with section 404, which is why Alamo has called on Congress to act.

Alamo acknowledged certain benefits to section 404, including an increased focus on corporate governance, improvements in corporate processes and control, and increased audit committee oversight. However, Alamo said the PCAOB attributes all of the benefits to the external audit of internal control, and none to management or boards of directors. The requirement is solely an invention of the appointed members of the PCAOB, Alamo wrote, and is redundant with the management assessments that are required by SOX. The PCAOB has never provided a cost/benefit justification for this redundancy, according to Alamo.

Alamo said the PCAOB's standard is focused less on the public interest and more on addressing audit firms' concerns about their potential liability. The company acknowledged the validity of litigation concerns, but said the PCAOB's revised standard would not change the U.S. litigation environment.

Alamo also raised concerns about the independence of the PCAOB's chief auditor who served as deputy chief auditor when AS2 was developed. Alamo noted that the chief auditor previously was a partner with a major accounting firm that lobbied regulators on this issue and before that was a senior technical adviser to the AICPA's Auditing Standard Board which initially proposed a "full-blown audit of internal control."

Alamo said the initial cost estimates of implementing section 404 were so grossly in error that it raised questions about the training and proficiency of those who prepared the estimates. If other accelerated filers' experiences are similar, Alamo said that about 40% of the costs can be attributed to AS2.

The PCAOB's additional guidance does not appear to reflect a reexamination of the need for and value of the external audit of internal control, Alamo wrote. Even as other international jurisdictions considered and rejected the PCAOB's approach, the Board went on to propose "more verbiage and further guidance." Alamo said this response calls into question whether the PCAOB's composition, internal procedures and supervision should be reconsidered.

Alamo recommended replacing the words in SOX section 103(a)(2)(A)(iii) and rewording section 404(b) to enable accounting firms to provide, at a more reasonable cost, assurance that management's assessment meets standards established by the SEC. Alamo suggested that the SEC establish benchmarks that management must meet. The benchmarks must be verifiable so that public accounting firms can objectively determine if management has met the standards for assessing internal controls. Meanwhile, Alamo urged Congress to halt the adoption of the PCAOB's proposed standard on or before February 26, 2007, the date on which comments are due on the revised standard.

Jacquelyn Lumb