Speech by SEC Chairman:
Opening Remarks Before the Roundtable on the Implementation of Internal Control Reporting Provisions
William H. Donaldson
U.S. Securities and Exchange Commission
April 13, 2005
I would like to welcome everyone to what is certain to be a robust and informative discussion. I'd like to thank each of the panelists for their willingness to come to Washington today and devote their energy and constructive thinking to a topic of great importance to the nation's public companies. I'd like to extend a particular welcome to Chairman McDonough and Kayla Gillan, Dan Goelzer, Bill Gradison and Charlie Niemeier of the PCAOB. I think this is a great opportunity for our two organizations to work and learn alongside each other.
The Sarbanes-Oxley Act was a necessary and understandable response to an unprecedented string of corporate scandals, which were rooted in intolerable governance, accounting and audit failures. Section 404 of the Act requires that management assess and report on the effectiveness of their internal controls over financial reporting, and that the company's external auditor report on both the internal controls and management's assessment of these controls.
As I have said before, of all the provisions of the Sarbanes-Oxley Act, the internal control requirements of Section 404 may have the greatest potential to improve the accuracy and reliability of financial reporting. Strong controls are an important part of this goal because our capital markets run on the basic premise that companies will present reliable and complete financial data for investment and policy decision-making. But we also understand that the process of implementing the requirements of Section 404 - as well as the related SEC and PCAOB rules - has consumed considerable time, energy and resources, and has generated intense debate.
My staff and I have heard stories, as I am sure many of you have, of:
- substantial and unanticipated expenses, including internal overhead, audit fees and software expenses,
- companies pulling staff from other strategic projects to help with internal control reporting,
- management and auditors talking past one another, and
- duplicative testing procedures with little or no reliance on prior work.
With the distinguished and diverse group of panelists we've assembled, this is an opportunity for us to hear how the process really worked for issuers in general. Are these isolated instances or are they widespread? Which of the problems encountered this year were attributable to first year "growing pains", and which are likely to recur every year? What are your suggestions for improvement, and how can we help further? We also want to know whether the steps we took to ease the process- such as issuing staff guidance and delaying compliance dates for some groups - were helpful.
We'd like to get an idea of how registrants and others feel they have benefited from the internal control reporting process. We know that, of the over 2,500 registrants that filed their internal control reports by March 31st, approximately 8% reported material weaknesses. But we've also heard from at least one accounting firm that, within a group of 225 registrants the firm audits, approximately 63,000 control deficiencies - that's an average of 275 per company - were identified and remediated. We look forward to hearing more about this.
We also want to hear from investors - was the internal control information provided by companies helpful? What was the investor community's reaction to reports of material weaknesses?
This roundtable is an important vehicle for gathering feedback on all aspects of the reporting process, and - as you can tell - I welcome candid and constructive feedback from each of our panelists. It is extremely important to my fellow Commissioners and I - as well as the PCAOB Board members - that we hear the experiences and views of people who are familiar with implementing the internal control reporting provisions of Section 404. We also want to make sure we are helping companies and auditors accomplish the goals of Section 404 in the most effective and efficient way. In addition to the information we learn from this roundtable, we also will be considering the written submissions we have received in response to our request for feedback. Those submissions are available to the public on the SEC website. The important work of the SEC Advisory Committee on Smaller Public Companies, which had their first meeting yesterday, also will inform our understanding of how Section 404 can be implemented in the most sensible way for smaller companies.
I'm going to keep my remarks brief, because we have a lot of ground to cover. Again let me express my thanks to all of the panelists who have agreed to be here today. We appreciate the time that you are taking out of your very busy schedules in order to share your views with us. We'll be listening carefully, and I can assure you that we intend to consider all of the different views expressed today. I will have further comments at the end of the roundtable, regarding next steps. For now, I would like to give Bill McDonough, Chairman of the PCAOB, an opportunity to say a few words before we get started.