Manufacturers Alliance/MAPI Inc.
March 4, 2003
VIA E-mail: firstname.lastname@example.org
Jonathan G. Katz, Esq.
Re: File No. S7-40-02, Release No. 33-8138
Dear Mr. Katz and Members and Staff of the Commission:
Disclosures Pursuant to the Sarbanes-Oxley Act of 2002-
Manufacturers Alliance/MAPI Inc. appreciates having this opportunity to comment to the Securities and Exchange Commission on Release No. 33-8138 pertaining to implementation of Sections 404, 406, and 407 of the Sarbanes-Oxley Act of 2002.1
For SEC's information, most Alliance members are public companies registered with the Commission. Consequently, they are subject to the Act, and the Alliance therefore has a direct interest in this proceeding.
Our recommendations at this time deal primarily with the transition as it applies to Section 404 controls attestation. In brief, we believe that SEC should announce that the provisions for external attestation to annual internal control reports by management would not apply to an affected registrant until fiscal years ending on or after a date that is six months following the date of publication of applicable attestation standards.
This recommendation and related suggestions are discussed below following a background note.
The Sarbanes-Oxley Act of 2002 created the Public Company Accounting Oversight Board (PCAOB or Board) to oversee the external auditors of public companies by means of registration, standard setting, inspections, and disciplinary programs.2
The five-member board, not yet fully appointed and staffed, is organized as a nonprofit entity in the private sector, with offices in Washington, DC. SEC has oversight and enforcement authority as to the Board. No rule of the Board will become effective without prior approval of the Commission, other than for initial or transitional standards.
Various time lines were set forth in the law for PCAOB. Notably for current purposes, SEC must certify the Board to be operational by April 26, 2003. Within 180 days after April 26, 2003, public-company audit firms must register with PCAOB.
As required by the Act, PCAOB will issue standards to be used by public company auditors, including controls-attestation standards. Under SEC's proposals, the Act's provisions for annual internal control reports by management, as well as the related external auditors' attestations and reports on management's evaluation of controls would apply to public companies with fiscal years ending on or after September 15, 2003.
Page 32 of SEC's Release inquires about the adequacy of the transition period just mentioned. As to the regulations under Act Section 404, SEC observes in its release that auditor attestation must conform to "standards of attestation engagements" established by the PCAOB. Consequently, SEC construes congressional intent as allowing delayed effectiveness of the Section 404 regulations.
In submitting these recommendations, the Alliance naturally assumes that the development of controls attestation standards by PCAOB will be done in public proceedings affording due process. However, we have been unable to determine the status of the planned PCAOB agenda or, pursuant to Act Section 103, the Board's intentions for adopting standards developed and used elsewhere.3
The Transition Issue
When SEC prepared Release 33-8138 after the Act was signed into law on July 30, 2002, SEC undoubtedly thought the proposed transition-i.e., effective for fiscal years ending on or after September 15, 2003-to be adequate. However, in light of delays to date in organization, we find the proposed transition time frame too confining for companies initially affected by the measure.
The delays just noted will postpone the issuance of the Section 404 controls-attestation standards. Meanwhile, public companies and their auditors do not know what is required of them, and will not know until the Board promulgates final standards. Once the standards are known, auditors and clients will need time to coordinate and integrate the stipulated control work with the year-end financial audit.
The promulgation of Section 404 controls attestation standards-allowing for due process and final SEC clearance-would appear, at a minimum, to be months away. Due process will entail the Board's public notice of a proposal, a month (preferably two) for receipt of public comments, possibly a public hearing, the issuance of final rules including an explanation of comments received and the Board's conclusions, and at least 30 days after publication before the rules are effective.4
Meanwhile, under the proposed transition, the first tier of affected companies will consist of those with fiscal years ending on or after September 15, 2003.5 Year-end financial audit is a major undertaking, as the Commission and Board are aware. Public companies and their external auditors must have adequate advance notice of these requirements so that they can plan for the annual audit.
With little time remaining until the proposed transition commences, SEC, in our opinion, should announce that the transition is being revised so that it will apply to affected registrants for fiscal years ending on or after a date that is six months following the date of publication of final Section 404 controls attestation standards.
This recommendation would have the effect of postponing the transition for some companies. For example, companies with fiscal years ending September 30 might have the external auditor attestation delayed by one fiscal year. Possibly the same extension would occur for companies with later fiscal years (e.g., October 31 and November 30), depending on how much time is needed for PCAOB to be "up and running" and to address the standards in question.
In our opinion, our recommendation would cause no harm, and the requested relief is in order. Management reports on controls for annual and quarterly reports would continue. Furthermore, external auditors would perform their routine controls testing in support of their opinions about financial statements. The Act's annual controls attestation would commence in a more realistic time frame.
Alternatives? We question whether there is a practical alternative to a one-year delay for companies in the initial wave(s) of affected entities because the annual financial audit is the vehicle for the Section 404 attestation.
As SEC is aware, companies make every effort to complete their year-end closings and the related external audit expeditiously to satisfy various constituencies and to meet filing deadlines. In all public companies-not to mention those with operations around the globe-year-end closing and audit are major undertakings requiring substantial lead-time and close coordination to optimize coverage.
The year-end audit cannot be delayed, and an attestation engagement in a context other than year-end is not what the Act contemplates. Further, to separate the two would be costly and inefficient. Indeed, separation would be inconsistent with the pattern otherwise established by the Act in having both annual and quarterly management disclosures with respect to controls.
If SEC has any concern about our recommendation to adjust the transition, then we recommend that the Commission redesign the transition in a way more nearly consistent with the agency's calendar, PCAOB's status, realistic estimates of time needed for rule making with due process, SEC's executive discretion, and any perceived exposures-being mindful that procedural fairness is essential and will facilitate orderly implementation.
Public notice. Finally, we wish to emphasize that SEC should act on this transition matter promptly and should inform the public immediately of its intentions, including appropriate relief for public companies.
We also suggest that SEC periodically advise the public of the Commission's calendar as it relates to PCAOB by posting to the SEC Web site and by other means for serving public notice. If the PCAOB Web site is not soon operational, we recommend further that SEC provide a page on the Commission's site for Board use during construction.
* * *
Although this Alliance statement is tendered after the public-comment deadline, we offer it now for the public record because the issue in question was not of consequence during the comment period. Concern now is escalating with the passage of time and increasing doubt about the feasibility of the proposed transition provision.
The Alliance trusts that SEC will find these views to be constructive and useful. If there are questions about this submission, please call the undersigned at (703) 841-9000, ext. 240.