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

Small Firms Provide Section 404 Implementation Experience

The PCAOB's Standing Advisory Group yesterday obtained the views of two small firm auditors and the chairman and CEO of a small business on their experience in implementing Sarbanes-Oxley Act section 404 and Auditing Standard No. 2. Martin Singer, the chairman and CEO of PCTEL Inc. said the number one issue in implementing section 404 was the expense. He also found an arbitrariness in the process in connection with the definition of materiality. The positive impact of section 404 was that it exposed skill deficits, he said, which the company has since rectified.

The PCAOB's May 16 guidance was helpful, according to Singer. The most frustrating experience with the implementation of section 404 was the inability to talk with their auditor, he explained, especially when they needed expert tax advice. Singer believes that section 404 has been poorly marketed. It has a noble purpose, he said, which is to form a contract with shareholders that the company will do things right.

Walter McNairy, director of Dixon Hughes PLLC's SEC services, reported that his firm picked up some new clients that had previously used Big 4 accounting firms but could not longer afford their fees. He said there are several areas in which he would like to see additional guidance. In a risk-based approach, an auditor can eliminate from testing those systems that have a remote possibility of leading to a material misstatement in the financial statements, he noted. He said that definitions of "remote" and "material" would be useful. Alternatively, McNairy suggested that the PCAOB provide more examples of factors to consider. McNairy also said he would like to see a change in the SEC's independence rules to permit more auditor assistance in the preparation of financial statements.

Lynn Turner, with Glass Lewis & Co., said he has heard reports that small businesses are not taking advantage of the additional time they were given to prepare for the implementation of section 404. He noted that the error rate for smaller companies and auditors is two to three times higher than for larger companies. The delay raises costs as well, he said.

PCAOB Chairman William McDonough thanked the panelists for their input, noting that the PCAOB does not have a monopoly on wisdom and can benefit from the input of others. Deputy chief auditor Tom Ray said that among the significant points that came out of the two-day Standing Advisory Group meeting was that auditors will more fully integrate their audits of internal controls and financial reporting and will make better use of the work of others. Auditors will also be more consultative with their audit clients without fear of losing their independence and will continue to focus on training.

For issuers, the first year of implementation brought a lot of remediation efforts which gave them a late start on their internal controls. Some issuers will review the design of their internal control systems to place more emphasis on preventive controls. Ray implored nonaccelerated filers and foreign private issuers not to delay the process of implementing the section 404 provisions.

The PCAOB will continue its dialogue with issuers and auditors, he said, which has been extremely valuable. The inspection process will provide important data on the first year of implementation which the staff will distill and make broadly available. That will take a while, Ray added, since the inspections have just begun. The staff understands concerns about providing too much additional guidance and will be sensitive about its timing if it is deemed necessary, he advised.