SEC Seeks Comment on Specific Issues as Part of AS5 Approval

In a surprise move, the SEC has posed a number of specific questions about the PCAOB’s new internal controls audit standard as part of the approval process. The Board adopted AS5 last month as part of a comprehensive and coordinated reform of the internal control reporting regime under Section 404 of Sarbanes-Oxley. At the same time, the SEC issued management guidance.

AS5 is now awaiting SEC approval, with a public comment period until July 12. The SEC seeks comment on whether AS5 is sufficiently clear about the extent to which auditors can use the work of others. The Commission also asks if AS5’s definition of material weakness, which is consistent with the definition the SEC adopted, appropriately describes the deficiencies that should prevent the auditor from finding that the internal controls are effective. Similarly, the SEC asks if the requirement that the auditor communicate any significant deficiencies to the audit committee will divert auditors’ attention away from material weaknesses.

More broadly, the SEC seeks comment on whether AS5 will reduce expected audit costs under Section 404, particularly for smaller public companies. It is similarly asked if AS5 inappropriately discourages or restricts auditors from scaling audits, particularly for smaller public companies.

The SEC also wants to know if the standard of materiality is appropriately defined throughout the standard in a way that provides sufficient guidance to the auditors. For example, the SEC questions if materiality is appropriately incorporated into the guidance regarding the matters to be considered in planning an audit and the identification of significant accounts.