Nasdaq calls for further amendments to Sox 404

Action needed to stop over-auditing

Nasdaq, the world’s largest electronic stock exchange, has called for further amendments to the Public Company Accounting Oversight Board's (PCAOB) new auditing standard for Sarbanes-Oxley (Sox) Section 404 compliance, claiming that recent concessions have not gone far enough.

In a statement released to mark the fifth anniversary of the passing of the contentious auditing law, Nasdaq acknowledged that “the benefits of the legislation have been proven – among them greater transparency, accountability and improved corporate governance,” but urged further revision of Section 404 to prevent over-auditing.

“Nasdaq believes incremental progress has been made to improve Section 404 via the PCAOB proposed Auditing Standard No. 5 (AS5). However, Nasdaq believes AS5 has not provided the needed clarity or the tools to alleviate the root cause of unnecessarily onerous and costly auditing processes,” the statement read.

AS5 and the related shift to principles-based Sox compliance by the Securities Exchange Commission (SEC) were implemented in reaction to vehement protests from US public companies and politicians that the 2002 Act went too far and has debilitated American commerce rather than strengthened it.

Nasdaq’s recommendations include:

- Changing the auditor's role to focus on evaluating the effectiveness of management's internal controls programme, rather than the effectiveness of individual controls.

- A clearer, more workable definition of materiality to assist management and auditors.

- Establishing an ombudsman office in the PCAOB to serve as an advocate for issuers who feel their internal controls are being over-audited.

- Establishing a clear policy against over-auditing including a fine schedule against auditors, if necessary.

- Allowing companies with no material weaknesses to perform the auditor portion of Section 404 in alternate years.

- Raising relief for smaller companies by focusing on ‘smaller’ companies, not just ‘smaller and less complex’ companies.

Given that it took four and a half years to convince the SEC and PCAOB to give the ground they have, it seems unlikely that any appetite exists for changes in the near future, although Nasdaq has one influential figure on its side.

"Good governance depends on good controls and bright line standards. While AS5 represents improvement over the previous standard, it does not go far enough to help decrease regulatory complexity and reduce the risk for overzealous auditing. We must take bolder steps to make our markets more attractive and competitive," said Michael Oxley, Nasdaq’s vice-chairman and co-author of the Sarbanes-Oxley Act.

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