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White Encourages Dialogue Between Companies and Auditors

Corporation Finance Director John White has urged companies, their management and their board members to openly communicate with their auditors about their internal controls. For companies that have not yet had to comply with the section 404 requirements, White encouraged them to come to mutual understandings with their auditors with respect to their expectations and standards, even if the auditor attestation report is not yet required. These frank conversations may make the second year of compliance, when the auditor attestation report is required, proceed more smoothly, he said.

White said the staff's management guidance project continues to occupy a great deal of its time, but should make a substantial contribution to improving the implementation of section 404. He also noted that key members of the section 404 team have been added, including a new chief accountant and a new deputy chief accountant at the SEC, and a new chairman of the PCAOB.

The SEC issued releases in August that for the first time would separate the two reports required by section 404. Non-accelerated filers would not be required to provide the auditor attestation until their fiscal years ending on or after December 15, 2008. White said the SEC believes the costs of the auditor attestation may be higher for smaller public companies. Delaying this cost until the second year of compliance may benefit this group of filers, he explained.

The SEC also proposed that management's assessments be furnished rather than filed in the first year of compliance. By furnishing the reports, the SEC believes it is less likely that management will be subject to liability from being second-guessed. If the auditor disagrees with management's conclusions when it provides its attestation in the second year, White said it could place companies in a difficult position if management concluded that the controls were effective in the first year. White added that companies can seek the auditor's involvement in the first year if they believe it would be beneficial.

Auditors can be used as a resource for companies, according to White, whether they are subject to the section 404 audit requirements or not. He suggested that companies use the additional time provided by the proposal to communicate with their auditors about internal controls and to seek constructive feedback about their processes and conclusions.

White encouraged interested parties to comment on the SEC's roadmap to improve the efficiency of section 404 compliance. The comment period for the concept release on management guidance closes September 18. The deadline for comments on the proposal to extend the compliance date for non-accelerated filers, and to provide transition relief for newly public companies, was September 14.