Josh Jones
Senior Associate Chief Accountant
Office of the Chief Accountant
U.S. Securities and Exchange Commission
December 4, 2008
The Securities and Exchange Commission, as a matter of policy,
disclaims responsibility for any private publication or statement by any
of its employees. The views expressed herein are those of the author and
do not necessarily reflect the views of the Commission or of the author’s
colleagues upon the staff of the Commission.
1
Agenda
I. Improving the Implementation of SOX 404
I.
2007 and 2008 Activities
II.
Reporting Results
III.
Frequently Asked Questions
II. Other Initiatives
I.
SEC Advisory Committee on Improvements to
Financial Reporting (CIFiR)
II.
Interactive Data (XBRL)
III.
International Financial Reporting Standards (IFRS)
IV.
US Treasury Advisory Committee on the Auditing
Profession
2
Improving the
Implementation of SOX 404
2007 and 2008 Activities
3
2007 and 2008 Activities

404(a): Management Assessment




404(b): Auditor Attestation




Interpretive Guidance approved by Commission on May 23, 2007
Issued - “Sarbanes-Oxley Section 404: A Guide for Small
Business”
Both available on SEC website at:
http://www.sec.gov/spotlight/soxcomp.htm
Auditing Standard No. 5 (AS 5)

Approved by PCAOB on May 24, 2007

Approved by Commission on July 25, 2007
[Draft Issued – “Preliminary Staff Views – Guidance for Auditors
of Smaller Public Companies”]
Deferral of compliance for Non-Accelerated filers
COSO Monitoring Guidance
4
Improving the
Implementation of SOX 404
Reporting Results
5
Reporting Results
 Disclosure Issues
 Compliance issues
 Non-accelerated filers – no management report
included
 Management’s report does not include all required
components
 ICFR effective even though material weaknesses
are disclosed
 Relationship of ICFR and DCP
 Disclaimer language regarding additional
information included in management’s report is
not included in the auditor’s report (AS 5, C12-C14)
 Auditor’s report does not disclose impact of the
material weakness (adverse opinion) on financial
statement audit opinion (AS 5, par. 92)
6
Reporting Results
 Disclosure Issues

Transparency considerations

Management should also consider providing
disclosure that allows investors to understand the
cause of the control deficiency and to assess its
potential impact, including:



The nature of the material weakness
An analysis of how the material weakness affects
the company’s financial reporting and internal
controls
Management’s current plans (or the actions
management has already taken) to address the
material weakness
7
Reporting Results
 Disclosure Issues

Transparency considerations (continued)
 Does the disclosure allow users to determine
whether the deficiency has a pervasive impact on
ICFR?
 Does the disclosure adequately communicate the
actual cause of the material weakness (rather than
an overly broad description)?
 If financial statement adjustment led to the
material weakness, does the material weakness
disclosure adequately describe the ineffective
controls, rather than simply describing the
financial statement adjustment?
8
Reporting Results
 Disclosure Issues

Other Observations
Material and/or numerous
auditor/YE
adjustments
Accelerated
Non-accelerated
Restatement or
nonreliance on company
filings
Accelerated
Non-accelerated
Year 2
Year 3
Year 4
62%
64%
69%
33%
50%
32%
20%
5%
Companies with FYE’s after 11/14/07 and filed through 8/31/08
Source: Audit Analytics
9
Reporting Results
 Disclosure Issues

Other Observations (continued)

Restatement of financial statements without
considering original disclosures

Discussion of remediation effort often appears to
provide additional information about the material
weakness or potentially identifies additional
material weaknesses not disclosed

Auditor’s report contains more or different
information than management’s report
10
Reporting Results
 Disclosure Issues

Other Observations (continued)

No disclosure of the significance of an acquired
entity that has been excluded from the assessment
in the year of acquisition

Limited disclosures about certain changes in ICFR

Extensive “inherent limitations” language
11
Reporting Results: Year 4 Filers
(Companies with FYE’s after 11/14/07 and filed through 8/31/08)
 Approximately 7,700 filings

Domestic (91%), FPI’s (9%)

Accelerated (49%), Non-Accelerated (51%)
 Reported material weaknesses (i.e., ineffective
ICFR)

Accelerated

Non-Accelerated
Source: Audit Analytics
6.6%
22.3%
12
Reporting Results: Year 4 Filers
(Companies with FYE’s after 11/14/07 and filed through 8/31/08)
 Accelerated filers reporting ineffective ICFR

Year 4
6.6%
 All filers reporting ineffective ICFR

Year 3
9.3%

Year 2
11.2%

Year 1
16.0%
 Compared with 21.9% of non-accelerated filers
reporting ineffective ICFR in Year 4, their first
year under 404(a)
Source: Audit Analytics
13
Reporting Results: Ineffective ICFR
Selected Financial Statement Elements Involved
Year 2
Year 3
Year 4*
Income taxes
34%
30%
30%
Revenue recognition
31%
25%
24%
Liabilities and payables
28%
24%
19%
Accounts and loans receivable
25%
20%
25%
PPE/Fixed/Intangible Assets
Valuation
19%
20%
16%
Foreign/Related/Affiliated/
Subsidiary Party Issues
16%
19%
13%
Inventory and cost of sales
27%
19%
20%
* Includes data for only accelerated filers
Source: Audit Analytics14
Ineffective ICFR:
Selected Issues Identified
Year 2
Year 3
Year 4*
Acctg documentation, policy, and/or
procedures
99%
100%
100%
Acctg personnel resources,
competency, training
58%
58%
63%
Untimely or inadequate account
reconciliations
29%
27%
23%
IT, software, security issues
21%
23%
27%
Nonroutine transaction control issues
21%
22%
16%
Segregation of duties/design of
controls
16%
17%
12%
Journal entry control issues
15%
14%
10%
Ethical compliance issues with
personnel
8%
7%
6%
Senior management resources,
competency, reliability issues
6%
6%
6%
* Includes data for only accelerated filers
Source: Audit Analytics15
Improving the
Implementation of SOX 404
Frequently Asked Questions
16
Frequently Asked Questions
 Non-Accelerated Filers F/S Audits

Auditors are not required to evaluate the
effectiveness of ICFR (i.e., perform an ICFR audit
under 404(b))


Does not preclude dialogue
What should the auditor do if management does not
perform an assessment or if management’s
assessment is believed to be inaccurate? For
example:

Management reaches an incorrect conclusion as
to effectiveness of ICFR

Management does not disclose all identified
material weaknesses
17
Frequently Asked Questions
 Non-Accelerated Filers F/S Audits (continued)

Audit Considerations (e.g. if the auditor identifies
deficiencies as part of the financial statement audit):
 Understand how management has considered the
information in its assessment
 Be mindful that management may have
considered compensating controls or other
matters in its assessment
 If, after understanding management’s response,
the auditor still believes that management has not
adequately considered the deficiency, consider
discussion with the audit committee
 Any residual concerns require the auditor to
consider whether management’s assessment
contains a material misstatement of fact, and
follow the guidance outlined in AU 550.06 (SAS 8)
18
Frequently Asked Questions
Staff Guidance

Staff FAQs address issues such as FIN 46R, equity method
investments and Type 2 SAS 70 reports.

SEC Staff speeches
Contacts

The SEC's Office of the Chief Accountant is happy to assist
with Section 404 questions. You can submit a question by
email to 404smallbusiness@sec.gov.


More information can be found at:
http://www.sec.gov/info/accountants/ocasubguidance.htm
For help with other compliance issues of importance to
smaller companies, visit the Division of Corporation
Finance's Office of Small Business Policy website at
http://www.sec.gov/info/smallbus/reachsec.htm, or email us
at smallbusiness@sec.gov.
19
Other Initiatives
20
Other Initiatives
 SEC Advisory Committee on Improvements to
Financial Reporting (CIFiR)
 Interactive Data (XBRL)
 International Financial Reporting Standards
(IFRS)
 US Treasury Advisory Committee on the
Auditing Profession
21
SEC Advisory Committee on Improvements
to Financial Reporting (CIFiR)
 Background

Emanated from concerns about complexity of
financial reporting

Examined the U.S. financial reporting system to
identify possible improvements

Chaired by Robert Pozen

Composed of preparers, investors, audit committee
representatives, auditors, attorneys and regulators

Observed by FASB, PCAOB, IASC, Federal Reserve
Board and Department of Treasury

Issued “developed proposals” in February 2008,
final recommendations on August 1, 2008
22
Interactive Data (XBRL)
 EXtensible Business Reporting Language
 Extensible
– allows for customization
Reporting – Exchange of interactive business
information over the Internet
 Business
– XML-based language for defining
information
 Language
 XBRL is tagged data (machine readable)
23
Interactive Data (XBRL)
 Proposing Release Phase-In
 Largest domestic and foreign accelerated filers that use US GAAP would
provide an additional exhibit containing financial statements, and any
applicable financial statement schedules, in XBRL beginning with fiscal
periods ending on or after December 31, 2008





Approximately 500 largest companies
Companies also would be required to post this information on their
websites
All other domestic and foreign large accelerated filers using US GAAP
would phase-in beginning with fiscal periods ending on or after
December 31, 2009
All remaining filers using US GAAP and all FPI’s that prepare their
financial statements using IFRS, as issued by the IASB, would phase-in
beginning with fiscal periods ending on or after December 31, 2010
The required tagged disclosures would include companies’ primary
financial statements, footnotes, and financial statement schedules
 Financial statement footnotes and schedules initially would be
tagged individually as block text
 After a year of such tagging, a filer would be required to tag the
detailed disclosures within the footnotes and schedules
24
International Financial Reporting
Standards (IFRS)
 Significant Milestones
 April 2005 – SEC staff publishes IFRS “Roadmap”
 March 2007 – SEC staff roundtable
 July 2007 – Proposing Release on acceptance of IFRS
financial statements without reconciliation to US GAAP
for foreign private issuers (FPIs)
 August 2007 – Concept Release on allowing IFRS for US
issuers
 November 2007 – Commission approved elimination of
reconciliation to US GAAP by FPIs using IFRS as issued
by the IASB
 December 2007 and August 2008 – SEC staff roundtables
 November 2008 – SEC publishes for public comment a
proposed “Roadmap” for the potential use of IFRS by U.S.
25
issuers
Treasury Committee
Objective was to provide advice and
recommendations on the sustainability of a strong
and vibrant public company auditing profession
Committee was co-chaired by Arthur Levitt Jr.
and Don Nicolaisen
Three subcommittees

Human Capital

Firm Structure and Finances

Concentration and Competition
SEC and PCAOB were official observers of the
committee
Issued final report October 6, 2008

Recommendations
26
Questions
27