What to make of the SEC's Sarbox recommendations

The SEC's Sarbox proposals last week contained few surprises. Broadly speaking, the SEC indicated its support of a new compliance philosophy, one that encourages auditors to focus on areas that are likely to result in "material" deficiencies instead of forcing auditors into a cover-your-butt mentality that views all control issues equally (here's a funny point on "coffee procurement"). One issue is how to define "material." The SEC did not provide a definition. But perhaps one, even a loose one, will bubble forth from the soon-to-arrive rewrite of AS2 by the PCAOB. The recent report from the Committee on Capital Markets Regulations proposed something of a 5 percent of pre-tax income rule, which would suffice. All in all, the details will be key, but the high-level view looks good. While the SEC voted to issue guidance, we'll need to see what the guidance looks like. One improvement: The SEC is proposing that compliance with the guidance constitutes compliance with the law. In addition, the SEC will require only one audit opinion, on the effectiveness of controls. But again, this will require an opinion on management's assessment. So the benefits may be elusive. As for small companies, there's a lot to think through (see next item).

For more:
- here's an article from CFO.com
- see the SEC's release