Corporate Governance

The SEC Advisory Committee on Improvements in Financial Reporting's Final Report to the SEC

By Tamar Weinrib

In an effort to increase the effectiveness of financial statements in informing the investing public, the SEC Advisory Committee on Improvements in Financial Reporting recently issued its final report, which contains recommendations for major reform to regulation and standard setting with regard to financial statements and independent audits of financial statements.  Its recommendations fall into four broad categories: Substantive Complexity, Standards-Setting Process, Audit Process and Compliance, and Delivering Financial Information. None of the recommendations will take effect until formally adopted by the SEC. 

The committee's report urged that the SEC and PCAOB adopt policy statements, designed to protect auditors, which would clarify how they evaluate the reasonableness of an auditor's judgment of financial statements.  This will also encourage auditors to follow a more rigid process which will in turn increase investor confidence in their judgments.  For example, the committee's report discusses making a determination of how to correct a material error, which would be based on the needs of investors making current investment decisions ? some corrections requiring restatements and others requiring disclosure only.

The report also recommended the creation of a Financial Reporting Forum which would meet with the SEC, FASB, and PCAOB to discuss financial reporting challenges and how those challenges are met.  In addition, the committee recognized the improvement in internal controls as a result of section 404 of Sarbanes Oxley but suggested that efforts to improve internal control go one step further. Specifically, they recommend that the SEC and the PCAOB focus on encouraging methods that will identify and correct weaknesses early, particularly as they relate to the potential for fraudulent financial reporting.

The committee?s report will likely lead to the implementation of new rules and standards over the next couple of years so companies should evaluate the effect of the recommendations and determine how to monitor ongoing changes.

Full post as published by PomTalk on August 11, 2008 (boomark / email).