Wednesday, November 22, 2006

PCAOB Member Issues Ringing Endorsement of 404 Internal Controls

By James Hamilton, J.D., LL.M.

On the eve of what is expected to be major SEC-PCAOB revisions to the internal controls regulations, PCAOB Member Charles Niemeier has set forth a vigorous defense of the internal control mandates of Sarbanes-Oxley. He has even found a new use for the outside auditor internal control reports, urging state boards of accountancy to use the reports to obtain information about the adequacy of internal accounting personnel. In recent remarks to the Nat’l Association of State Boards of Accountancy, he related that a leading cause of reported material weaknesses in corporate controls is a problem with in-house accounting personnel, including competency, training, and experience. Indeed, he continued, in both of the last two years approximately one-half of companies that have reported material weaknesses did so because of such personnel problems.

While making the by now obligatory reference to the high cost of the internal controls mandate, he said that Section 404 of Sarbanes-Oxley has produced real and measurable benefits on a number of fronts. For example, it has spurred companies to perform long-delayed maintenance on the internal controls, as well as assisiting companies and their auditors in predicting the risk of future financial reporting failure. The Member also posited that internal control reports are serving as an important tool to expose material misstatements in past and current financial statements.