Regulators to begin SOX reviews

Regulators are preparing to review elements of the Sarbanes-Oxley Act to determine whether or not portions of the financial reporting legislation should be relaxed to ease the burden on companies doing business in the United States.

On May 24, the PCAOB (Public Company Accounting Oversight Board) -- the nonprofit oversight group created to help manage application of the Sarbanes Oxley Act -- plans to meet in Washington to vote on a range of topics, including several issues that could shift the application of the legislation, originally passed in 2002 to help fight corporate financial fraud.

In the meetings, the group is expected to approve a final standard for auditing internal control over financial reporting as well as a related independence rule and several other measures.

If adopted, the rule will supersede PCAOB's existing Auditing Standard No. 2, also known as "An Audit of Internal Control over Financial Reporting Performed in Conjunction with an Audit of Financial Statements."

The PCAOB also plans to vote on two separate recommendations to amend its rules on the frequency and level of scrutiny in required inspections to test compliance with SOX.

The first recommendation under consideration by the group is a proposed amendment to Rule 4003 of SOX that would remove an existing requirement for the PCAOB to regularly inspect each registered public accounting firm that plays a "substantial role" in SOX audits but does not issue audit reports.

In its original terms, SOX only requires the PCAOB to inspect registered firms that regularly issue audit reports.

The second recommendation under consideration in the meetings will be a proposal for the PCAOB to vote on whether to keep provision D of Rule 4003 in place beyond its planned retirement date on June 30, 2007. The oversight agency first set the so-called "sunset date" when it adopted the measure in Dec. 2006, to allow for public comment before making a final determination on the provision.

The provision was adopted to extend the time period during which the PCAOB must conduct the first and second SOX compliance inspections of firms that registered in 2003 and 2004.

In the next several weeks, regulators with the Securities and Exchange Commission (SEC) -- which appoints all members on the PCAOB's five person board -- will review a number of proposed changes in SOX, several of which aim to loosen requirements of the regulation considered by some critics to be too harsh on public companies.

Among the changes to SOX that will be considered by the SEC will be whether or not to shift rules that require companies to internally review their anti-fraud controls, one of the most controversial elements of the regulation based on the amount of time and effort needed to perform such tests on a frequent basis.

At its public meeting in mid-Dec. 2006, the PCAOB promised to review several aspects of SOX to help companies control expenses related to the regulation, which has spurred the development of a substantial software market focused specifically on helping businesses meet the strict compliance audits imposed by the act.

While the tough auditing rules have led to improvements in companies' accounting habits, the laws have also significantly increased operating costs at many firms, the PCAOB said.