SEC passes new AS5 Sox auditing rules

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The Securities and Exchange Commission (SEC) has voted unanimously in favour of the new Sarbanes Oxley (Sox) auditing standard proposed earlier in the year by the Public Company Accounting Oversight Board (PCAOB).

Although the vote was little more than a formality, the Commission’s acceptance of Auditing Standard No. 5 (AS5) is the last step in implementing a long-sought-for shift to less prescriptive auditing rules in the annual Sox compliance process.

AS5 was developed in tandem with the SEC’s own new management guidance for Sox, which seeks to make Section 404 audits and management evaluations more risk-based and scalable to a firm’s size and complexity.

The new procedures are intended to increase the accuracy of financial reporting while reducing unnecessary costs, especially for smaller public companies.

"This standard and the Commission's interpretive guidance for management represent the culmination of two years' work by the Commission and the PCAOB to make Section 404 more effective and efficient. I want to thank everyone for their work in addressing the concerns created by the unduly expensive and inefficient Auditing Standard No. 2," said SEC chairman Chris Cox.

Among the detail of the AS5, the mandatory requirements of the previous auditing standard have been reduced, allowing the auditor to focus on performing tests in those areas where, in the auditor's judgement, they’re actually necessary.

In a concession for audits of smaller and less complex companies, the auditor can reduce the amount of internal control testing and consider alternative controls. AS5 also directs auditors to those areas that present the highest risk and allows them to use knowledge accumulated in previous years' audits to reduce testing.

Both the SEC and PCAOB were lauded for their work by representative Barney Frank, chairman of the House Committee on Financial Services, although it seems unlikely the new rules will draw a line under the protests that have characterised the first five years of the Act.

Earlier this week, Nasdaq issued a statement calling for regulators to create an ombudsman to give firms recourse to complain if they feel they are been audited in an unnecessarily costly and time-consuming fashion. The stock exchange also claimed AS5 represented nothing more than “incremental progress”, in alleviating the compliance burden.