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

SEC and PCAOB Announce Next Steps for Section 404

The SEC and the PCAOB announced plans to improve the Sarbanes-Oxley Act internal control reporting requirements on the same day that legislation was introduced to ease the section 404 requirements. The SEC also announced that it will again postpone the effective date of the rules implementing section 404 for non-accelerated filers. Filers must still comply with the management assessment requirement for fiscal years beginning December 16, 2006. The SEC noted that all public companies ultimately will be required to comply with the internal control reporting requirements of section 404.

The SEC advised that it will issue a concept release and seek public comment on the areas in which additional guidance will assist management with the internal control requirements. The concept release will also solicit views on the appropriate role of the outside auditors and alternatives to the auditor attestation requirement.

The SEC will consider whether the guidance to be issued by the Committee of Sponsoring Organizations for smaller public companies will assist those companies in completing their section 404 assessments and whether additional guidance will be needed from the SEC. The SEC also plans to issue guidance to assist management in the performance of a top-down, risk-based approach to assessing internal control over financial reporting. The guidance will be scalable to meet the needs of non-accelerated filers and smaller public companies.

The PCAOB announced that it will consider amendments to Auditing Standard No. 2 to ensure that auditors focus on the areas that pose the highest risk for fraud or material error. The PCAOB will also consider whether to clarify the definitions of significant deficiency and material weakness in internal control, reconsider what constitutes a strong indicator of a material weakness, and encourage auditors to rely on the work of others in appropriate circumstances. The PCAOB will consider whether to clarify materiality and scoping decisions and will emphasize the need to integrate the audit of internal control with the audit of the financial statements.

The PCAOB advised that the effective date for any amendments that it adopts will be determined in a manner that is not disruptive to ongoing audits and that will not impede auditors' efforts to implement its May 2005 guidance. The SEC said that it plans to examine some of the PCAOB's operations, including its inspection program, to see if the principles outlined by the Board in a May 1, 2006 statement have been implemented. The PCAOB said it welcomes the SEC's examination. The PCAOB also plans to develop guidance for auditors of small companies and will continue to hold forums on auditing in the small business environment.

The Competitive and Open Markets Protecting and Enhancing Treatment of Entrepreneurs Act, known as COMPETE, was introduced yesterday by Senators Jim DeMint (R-SC), Mel Martinez (R-FL) and John Ensign (R-NV), and Representatives Tom Feeney (R-FL), Pete Sessions (R-TX), Candice Miller (R-MI) and Gregory Meeks (D-NY). The legislation would ease the section 404 requirements for small companies, clarify and define a number of terms, and make clear that external auditors may provide companies with technical advice during their internal audits. The House version of COMPETE includes a requirement that the SEC and the PCAOB conduct a joint study to contrast the U.K.'s principles-based Turnbull Guidance with the implementation of section 404, and report back within one year of COMPETE's enactment.