September 18, 2006
Nancy M. Morris
Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549-1090
Re: SEC File Number S7-11-06
Concept Release Concerning Managements Reports
on Internal Control Over Financial Reporting
Dear Ms. Morris:
In providing the following comments, please note that these remarks are my own and do not necessarily reflect the views of any company with which I am affiliated or represent.
I applaud the SEC's most recent initiative in relation to easing the unintended burdens on issuers as a consequence of certain implementation aspects of Section 404 of the Sarbanes-Oxley Act of 2002 (the "Act") and providing additional clarity, particularly to auditors and management. The two Roundtable discussions hosted by the SEC and the PCAOB helped identify many areas of concern and elicited many thoughtful suggestions on how to alleviate some of the burdens shouldered by public companies without compromising the integrity and intent of the Act. While I agree with and support the principles set forth in the Concept Release and the identified areas for additional guidance, I have restricted my remarks to the following two areas of concern.
With respect to the application of standards of materiality, it has been my experience that there is no uniformity with respect to the thresholds of materiality that are applied to companies by auditors, irrespective of size, industry and financial condition of a particular company. Accordingly, this somewhat arbitrary application of materiality has led to confusion and inconsistency in scoping, identifying key controls and in determining what constitutes a material weakness or significant deficiency. In this regard, I believe that the definition of material weakness set forth in Auditing Standard Number 2 (AS2) is inconsistent with established principles of materiality, including those espoused in SAB 99, the 1989 MDA release (33-6835) and the seminal Supreme Court ruling in Basic v. Levinson. Therefore, I join with John Huber and others, who have urged for an amendment to AS2 to redefine material weakness to be more consistent with established principles of materiality.
Additionally, I believe that the provisions imposing (directly or indirectly) liability on auditors for failure to detect and/or prevent fraud should be relaxed so that the auditors can truly take a more reasonable approach to their testing and evaluation obligations. Until a legal accommodation is made (perhaps a safe-harbor provision) or clarity is obtained through legal process or pronouncements by the SEC or PCAOB, auditors will continue to find themselves in the precarious position attempting to balance the uncertainties surrounding their legal liability with the pressures to be more reasonable and flexible in their approach and interpretation of AS2.
Neil S. Belloff
EVP - U.S. Securities Counsel
600 Lexington Avenue, 17th Fl
New York, N.Y. 10022