(The news featured below is a selection from the news covered in the Federal Securities Law Reporter.)

Atkins Says PCAOB's Auditor Attestation Standard Should Be Reopened 

Commissioner Paul Atkins, speaking before the Investment Adviser Association, said the "tortured history" of the mutual fund governance rules was a curiosity and an unlikely subject for the pitched battle that ensued with their adoption. Mr. Atkins said that investors do not seem to care whether funds have independent chairs and a board made up of at least 75 percent of independent directors. Since Chairman Christopher Cox's arrival at the SEC, Mr. Atkins said the Commission is looking at costs and benefits in a number of contexts, including Section 404 of the Sarbanes-Oxley Act.

Commissioner Atkins maintained that the expenses associated with Section 404 are not the fault of the Sarbanes-Oxley Act or the SEC's implementing regulations. The complaints stem largely from the PCAOB's Auditing Standard No. 2, he said, which led to conservative judgments by management and their auditing firms and to over-documentation in an attempt to avoid second-guessing by regulators and litigators. Before the problems surrounding Section 404 can be resolved, he said the Public Company Accounting Oversight Board will have to reopen Auditing Standard No. 2.

Mr. Atkins said he is very concerned about applying Section 404 in its current form to smaller public companies. While recent reports have found a reduction in Section 404 costs, He is not convinced that the findings are representative of many companies. Based on the comments that have been submitted in advance of the SEC's and PCAOB's May 10 roundtable, he said there is still a lot of frustration with Section 404. He pledged that the SEC will work with the PCAOB to revise Auditing Standard No. 2. The commissioner added that new leadership at the SEC and the PCAOB will bring a fresh approach to the matter.

Commissioner Atkins said the SEC must provide more and better guidance for management in carrying out its internal control assessments. Having failed to provide that sort of guidance in the beginning, he said many companies looked to Auditing Standard No. 2 for guidance and deferred to their auditors on the steps they had to take to strengthen, document and test their internal controls. While the SEC's provisions were grounded in reasonableness, management instead looked to the detailed accounting directives.

The SEC's guidance should facilitate management's use of its own professional judgment, according to the commissioner. Management has a better understanding than the auditor of the company's unique characteristics. Mr. Atkins added that the SEC's guidance should be adaptable to companies of all types and sizes.

The report by the Advisory Committee on Smaller Public Companies made clear the need for reform of Section 404, in Mr. Atkins' view. Whatever the SEC does, he said it cannot risk crippling the small companies that sustain the U.S. economy. Mr. Atkins' hope is that Section 404, when properly implemented, will assist investors in gauging the level of risk in a company's reporting system by disclosing its oversight framework for financial reporting. If Section 404 can be revised to make its implementation more reasonable and serve this purpose, it could become one of the most valuable parts of the Sarbanes-Oxley Act, he said. 

Even with revised guidance, Mr. Atkins said that Section 404 will continue to raise concerns about litigation risks. Some class action lawyers are able to turn questions of professional judgment into lucrative lawsuits, he explained. If the U.S. legal system works as a "lottery system of justice," it may become an unattractive place to do business, according to Mr. Atkins. Europeans have told him that litigation risk and the Sarbanes-Oxley Act are the main reasons they are concerned about investing in the U.S.