File No. PCAOB-2004-03 - Comment LetterFrom: Scatena, Pat [pat.scatena@intel.com] Sent: Monday, May 17, 2004 4:23 PM To: rule-comments@sec.gov Subject: File No. PCAOB-2004-03 - Comment Letter INTEL CORPORATION 2200 Mission College Blvd. P. O. Box 58119 Santa Clara, CA 95052-8119 (408) 765-8080 May 17, 2004 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 C/o rule-comments@sec.gov Attn: Jonathan J. Katz, Secretary Re: File No. PCAOB-2004-03 - Release No. 34-49544 PCAOB Rulemaking: Public Company Accounting Oversight Board; Notice of Filing of Proposed Rule on Auditing Standard No. 2, An Audit of Internal Control Over Financial Reporting Performed in Conjunction with an Audit of Financial Statements Dear Mr. Katz: Intel Corporation is pleased to submit this comment letter to provide a brief comment on Securities and Exchange Commission (“SEC” or “Commission”) Release No. 34-49544 relating to the Public Company Accounting Oversight Board’s Auditing Standard No. 2, An Audit of Internal Control Over Financial Reporting Performed in Conjunction with an Audit of Financial Statements (the “Standard”). We are submitting this comment letter to request that the Commission either delete the one example of a “significant deficiency” set forth in Appendix D to the Standard, or revise that example to provide more clear guidance as to the factors that make the deficiency described in the example a “significant” deficiency. The Standard contemplates three categories for control issues—a deficiency, a significant deficiency and a material weakness. If the design or operation of a control does not allow management or employees to prevent or detect misstatements in a timely manner, there is a deficiency. If there is a more than remote likelihood that a misstatement that is more than inconsequential will not be prevented or detected, the deficiency is a significant deficiency. If there is a more than remote likelihood that a material misstatement will not be prevented or detected, the deficiency is a material weakness. The standard goes on to define “inconsequential” misstatements as ones which a reasonable person would conclude would clearly be immaterial to the financial statements. Materiality is a gray concept, involving substantial judgment in considering whether quantitative and qualitative factors indicate a particular set of facts and circumstances is or is not material. There is no black and white line between materiality and immateriality. The Standard introduces a third category into the mix—to categorize control deficiencies, issuers and auditors now must determine the dividing line between “clear” immateriality, something more than that but less than material, and true materiality. This determination will be quite difficult, and the use of a “reasonable person” standard allows the determination to be second-guessed in hindsight. At this late stage in the process of PCAOB rulemaking, we do not anticipate that the Commission will make major changes in the approach proposed in the Standard. We believe it is important, however, for Appendix D to the Standard to be clarified in one respect to assist issuers and auditors in making the difficult determination of the dividing lines between clear immateriality, significance and true materiality. The one example of a significant deficiency provided in Appendix D to the Standard does not provide any guidance to issuers on what in fact is a significant deficiency, and it introduces even more ambiguity into the definition. Example D-1 discusses a situation where the control process around intercompany transactions is deficient. The example notes that individual intercompany transactions are not material, and notes that detailed reconciliations of intercompany accounts are not performed on a timely basis. The example goes on to indicate that compensating controls are in place that would detect material misstatements, and then leaps to the conclusion that the deficiency is a significant deficiency. Nothing in the example indicates that there is a potential for a more than inconsequential misstatement, the example specifically states that individual intercompany transactions are not material and says nothing about aggregated transactions being more significant or additional control deficiencies in the same area increasing the probability that a more than immaterial impact on the financial statements could result. The example simply suggests that failing to reconcile immaterial individual transactions is de facto a significant deficiency. We urge the Commission to clarify this example to introduce some indication of the factors that would take the control situation from what is obviously a deficiency but not necessarily significant, to a “significant deficiency.” The example, as written, is not at all illuminating in this regard and simply introduces more ambiguity. We therefore recommend that the Commission either delete this example from the final Standard or revise the definition to provide further guidance as to the aspects of the particular control deficiency that make it significant. * * * We thank you for consideration of our views and we would be pleased to discuss the issues further at your convenience. I can be contacted at 408-765-9771, or you can contact Cary Klafter, Legal Department Director of Corporate Affairs, at 408-765-1215. Very truly yours, /s/ Patrice C. Scatena Patrice C. Scatena Assistant Director of Corporate Affairs Legal Department Intel Corporation 2200 Mission College Blvd. Santa Clara, CA 95052-8119