Speech by SEC Chairman:
Opening Statement at the Commission Open Meeting
Chairman Christopher Cox
U.S. Securities and Exchange Commission
April 4, 2007
Good morning. This is a meeting of the Securities and Exchange Commission under the Government in the Sunshine Act.
Today the Commission is meeting to consider the progress of revisions to the auditing standard under Section 404 of the Sarbanes Oxley Act, and the coordination of those revisions with the new 404 guidance for management that was proposed by the Commission in December.
This is a continuation of the process that the Commission and the Public Company Accounting Oversight Board jointly announced in May 2006. The comment periods for both the new management guidance and the new 404 audit standard ended more than a month ago, so that we are now entering the home stretch of completing this important work. Today's discussion is intended to keep us on track to consider final adoption of our proposed management guidance by the end of May.
There's another reason It was vitally important that we meet today in particular, because today is April 4 — "4-04." Opportunities like this don't come often. It will be almost 6,000 years, for example, before we'll have the same propitious conditions for considering amendments to our Form 8-K in the year 8K.
The order of events for today's meeting is as follows.
We will hear first from Mark Olson, Chairman of the Public Company Accounting Oversight Board, whom we've invited to report on the Board's progress in revising the 404 audit standard, and also on the status of our efforts to align the 404 guidance for management and the 404 standard for auditors.
Next, we will hear from Jeff Steinhoff, the Managing Director for Financial Management and Assurance at the U.S. Government Accountability Office. Mr. Steinhoff will present the results of the GAO's investigation into the implementation of Section 404 and its impact on smaller public companies, and also the GAO's recommendations for improvements in the implementation of Section 404.
Finally, we will hear from the Commission's professional staff, including the Office of the Chief Accountant and the Division of Corporation Finance, who will provide a status report on our work with the PCAOB and make recommendations for finalizing our respective proposals.
Introduction of Mark Olson
So let's begin by welcoming Chairman Mark Olson, of the Public Company Accounting Oversight Board. Thank you, Mr. Chairman, for appearing before the Commission today, and for your leadership toward an improved Section 404 process for companies of all sizes.
The PCAOB has been hard at work to replace the existing 404 audit standard with a more risk-based, top-down approach that is scalable for companies of all sizes. And in that effort, the Board under Chairman Olson's leadership has established a solid working relationship with the SEC.
The Sarbanes-Oxley Act, which created the PCAOB, has made our agencies partners in regulation. The SEC's responsibility for supervision of the PCAOB requires that not only the Board but also the Commission agree to and vote for new auditing standards before they can become effective. This requires a high level of coordination between the SEC and the PCAOB. If a standard were approved by the Board but not by the Commission, not only could it never take effect, but valuable time would be lost when the entire effort would have to begin anew. Our intent is to have a new audit standard and management guidance in place for use during the 2007 audit cycle, so there is no time to waste.
And for that reason, the Commission is particularly appreciative, Mr. Chairman, of the collaborative approach that you have taken to addressing this important priority. As Chairman Barney Frank succinctly put it, our job as regulators is to make the implementation of 404 "more flexible" and to "cut back on some of the excessive rules and regulations without compromising the core." You have shown a keen appreciation of that objective, and your leadership has been and will continue to be vitally important to the success of our joint efforts.
So Chairman Olson, welcome.
Introduction of Jeff Steinhoff
Next, I'd like to welcome Jeff Steinhoff of the Government Accountability Office.
Mr. Steinhoff is the Managing Director for Financial Management and Assurance at the U.S. Government Accountability Office. In this capacity, he leads the GAO's largest audit unit, with responsibility for oversight of financial management and auditing issues across the federal government. Among those responsibilities is the annual audit of the SEC's own financial statements. In addition, he represents the GAO on the PCAOB's Standing Advisory Group.
Over the past several years, the GAO has undertaken extensive work in studying the implementation of the Sarbanes-Oxley Act. This work includes at least nine studies and analyses of various aspects of Sarbanes-Oxley implementation. And it has focused in particular on the special challenges of applying the Section 404 requirements to smaller public companies.
Thus far, smaller companies have not had to comply with Section 404. But beginning next year, smaller companies will be expected to come into compliance, and so it's vitally important that we have a scalable approach that works for them. Both the Commission and the PCAOB have been urged by Congressional leaders — including House Financial Service Committee Chairman Barney Frank, Senate Small Business Committee Chairman John Kerry, and House Small Business Committee Chair Nydia Velasquez — to ensure that the Section 404 process is scalable for small businesses. And because these committees have cited to us the importance of GAO's report on the implementation of Section 404 for smaller companies, I am especially pleased that Mr. Steinhoff can be here today. We look forward to hearing from you about the GAO's views on the implementation of Sarbanes-Oxley for smaller public companies.
Mr. Steinhoff, welcome.
Introduction of Commission Staff
The final item on our agenda today is to hear from our professional staff on the status of work on revising the 404 auditing standard, and also the progress we have made in coordinating this with our proposed Management Guidance.
So to begin I'd like to now recognize Conrad Hewitt, Chief Accountant of the Commission, and John White, the Director of the Division of Corporation Finance, and their staff.
Following the staff's report and discussion on each topic, we'll have the opportunity for Commissioner questions and discussion. And following that, I'll ask whether the Commissioners support the staff's approach on that particular topic.
So let's begin by hearing from Conrad Hewitt, the Commission's Chief Accountant.