Josh Jones' Slides

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Josh JonesJosh JonesSenior Associate Chief AccountantSenior Associate Chief Accountant

Office of the Chief AccountantOffice of the Chief AccountantU.S. Securities and Exchange CommissionU.S. Securities and Exchange Commission

December 4, 2008December 4, 2008

The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any

of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission or of the author’s

colleagues upon the staff of the Commission.

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AgendaAgenda

I.I. Improving the Implementation of SOX 404Improving the Implementation of SOX 404

I.I. 2007 and 2008 Activities2007 and 2008 Activities

II.II. Reporting ResultsReporting Results

III.III. Frequently Asked QuestionsFrequently Asked Questions

II.II. Other InitiativesOther Initiatives

I.I. SEC Advisory Committee on Improvements to SEC Advisory Committee on Improvements to Financial Reporting (CIFiR) Financial Reporting (CIFiR)

II.II. Interactive Data (XBRL)Interactive Data (XBRL)

III.III. International Financial Reporting Standards (IFRS)International Financial Reporting Standards (IFRS)

IV.IV. US Treasury Advisory Committee on the Auditing US Treasury Advisory Committee on the Auditing ProfessionProfession

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Improving the Improving the Implementation of SOX 404 Implementation of SOX 404

2007 and 2008 Activities2007 and 2008 Activities



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404(a): Management Assessment404(a): Management Assessment Interpretive Guidance approved by Commission on May 23, 2007Interpretive Guidance approved by Commission on May 23, 2007 Issued -Issued - “Sarbanes-Oxley Section 404: A Guide for Small “Sarbanes-Oxley Section 404: A Guide for Small

Business” Business” Both available on SEC website at: Both available on SEC website at:

http://www.sec.gov/spotlight/soxcomp.htmhttp://www.sec.gov/spotlight/soxcomp.htm

404(b): Auditor Attestation404(b): Auditor Attestation Auditing Standard No. 5 (AS 5)Auditing Standard No. 5 (AS 5)

Approved by PCAOB on May 24, 2007Approved by PCAOB on May 24, 2007 Approved by Commission on July 25, 2007Approved by Commission on July 25, 2007

[Draft Issued – “[Draft Issued – “Preliminary Staff Views – Guidance for Auditors Preliminary Staff Views – Guidance for Auditors of Smaller Public Companies”of Smaller Public Companies”]]

Deferral of compliance for Non-Accelerated filersDeferral of compliance for Non-Accelerated filers

COSO Monitoring GuidanceCOSO Monitoring Guidance

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Reporting ResultsReporting Results



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Disclosure IssuesDisclosure Issues Compliance issuesCompliance issues

Non-accelerated filers – no management report Non-accelerated filers – no management report includedincluded

Management’s report does not include all required Management’s report does not include all required componentscomponents

ICFR effective even though material weaknesses ICFR effective even though material weaknesses are disclosedare disclosed

Relationship of ICFR and DCPRelationship of ICFR and DCP Disclaimer language regarding additional Disclaimer language regarding additional

information included in management’s report is information included in management’s report is not included in the auditor’s report (AS 5, C12-C14)not included in the auditor’s report (AS 5, C12-C14)

Auditor’s report does not disclose impact of the Auditor’s report does not disclose impact of the material weakness (adverse opinion) on financial material weakness (adverse opinion) on financial statement audit opinion (AS 5, par. 92)statement audit opinion (AS 5, par. 92)


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Disclosure IssuesDisclosure Issues Transparency considerationsTransparency considerations

Management should also consider providing Management should also consider providing disclosure that allows investors to understand the disclosure that allows investors to understand the cause of the control deficiency and to assess its cause of the control deficiency and to assess its potential impact, including:potential impact, including:

The nature of the material weaknessThe nature of the material weakness An analysis of how the material weakness affects An analysis of how the material weakness affects

the company’s financial reporting and internal the company’s financial reporting and internal controlscontrols

Management’s current plans (or the actions Management’s current plans (or the actions management has already taken) to address the management has already taken) to address the material weaknessmaterial weakness

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Disclosure IssuesDisclosure Issues Transparency considerations (continued)Transparency considerations (continued)

Does the disclosure allow users to determine Does the disclosure allow users to determine whether the deficiency has a pervasive impact on whether the deficiency has a pervasive impact on ICFR?ICFR?

Does the disclosure adequately communicate the Does the disclosure adequately communicate the actual cause of the material weakness (rather than actual cause of the material weakness (rather than an overly broad description)?an overly broad description)?

If financial statement adjustment led to the If financial statement adjustment led to the material weakness, does the material weakness material weakness, does the material weakness disclosure adequately describe the ineffective disclosure adequately describe the ineffective controls, rather than simply describing the controls, rather than simply describing the financial statement adjustmentfinancial statement adjustment??


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Companies with FYE’s after 11/14/07 and filed through 8/31/08Companies with FYE’s after 11/14/07 and filed through 8/31/08Source: Audit AnalyticsSource: Audit Analytics

Year 2Year 2 Year 3Year 3 Year 4Year 4

Material and/or numerous Material and/or numerous auditor/YEauditor/YE

adjustmentsadjustments

AcceleratedAccelerated

Non-acceleratedNon-accelerated62%62% 64%64% 69%69%

33%33%

Restatement or Restatement or nonreliance on company nonreliance on company filingsfilings

AcceleratedAccelerated

Non-acceleratedNon-accelerated

50%50% 32%32% 20%20%

5%5%

Disclosure IssuesDisclosure Issues Other ObservationsOther Observations

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Disclosure IssuesDisclosure Issues Other Observations (continued)Other Observations (continued)

Restatement of financial statements without Restatement of financial statements without considering original disclosures considering original disclosures

Discussion of remediation effort often appears to Discussion of remediation effort often appears to provide additional information about the material provide additional information about the material weakness or potentially identifies additional weakness or potentially identifies additional material weaknesses not disclosedmaterial weaknesses not disclosed

Auditor’s report contains more or different Auditor’s report contains more or different information than management’s reportinformation than management’s report


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Disclosure IssuesDisclosure Issues Other Observations (continued)Other Observations (continued)

No disclosure of the significance of an acquired No disclosure of the significance of an acquired entity that has been excluded from the entity that has been excluded from the assessment in the year of acquisitionassessment in the year of acquisition

Limited disclosures about certain changes in ICFRLimited disclosures about certain changes in ICFR

Extensive “inherent limitations” languageExtensive “inherent limitations” language


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Reporting Results: Year 4 FilersReporting Results: Year 4 Filers(Companies with FYE’s after 11/14/07 and filed through 8/31/08)(Companies with FYE’s after 11/14/07 and filed through 8/31/08)

Approximately 7,700 filingsApproximately 7,700 filings Domestic (91%), FPI’s (9%)Domestic (91%), FPI’s (9%)

Accelerated (49%), Non-Accelerated (51%)Accelerated (49%), Non-Accelerated (51%)

Reported material weaknesses (i.e., ineffective Reported material weaknesses (i.e., ineffective ICFR)ICFR) AcceleratedAccelerated 6.6% 6.6%

Non-AcceleratedNon-Accelerated 22.3%22.3%

Source: Audit Analytics

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Reporting Results: Year 4 FilersReporting Results: Year 4 Filers(Companies with FYE’s after 11/14/07 and filed through 8/31/08)(Companies with FYE’s after 11/14/07 and filed through 8/31/08)

Accelerated filers reporting ineffective ICFRAccelerated filers reporting ineffective ICFR

Year 4 Year 4 6.6% 6.6%

All filers reporting ineffective ICFRAll filers reporting ineffective ICFR Year 3 Year 3 9.3% 9.3%

Year 2 Year 2 11.2%11.2%

Year 1 Year 1 16.0%16.0%

Compared with 21.9% of non-accelerated filers Compared with 21.9% of non-accelerated filers reporting ineffective ICFR in Year 4, their first reporting ineffective ICFR in Year 4, their first year under 404(a)year under 404(a)

Source: Audit Analytics

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Reporting Results: Ineffective ICFRReporting Results: Ineffective ICFRSelected Financial Statement Elements InvolvedSelected Financial Statement Elements Involved

Year 2Year 2 Year 3Year 3 Year 4*Year 4*

Income taxesIncome taxes 34%34% 30%30% 30%30%

Revenue recognitionRevenue recognition 31%31% 25%25% 24%24%

Liabilities and payablesLiabilities and payables 28%28% 24%24% 19%19%

Accounts and loans receivableAccounts and loans receivable 25%25% 20%20% 25%25%

PPE/Fixed/Intangible Assets PPE/Fixed/Intangible Assets ValuationValuation

19%19% 20%20% 16%16%

Foreign/Related/Affiliated/ Foreign/Related/Affiliated/ Subsidiary Party IssuesSubsidiary Party Issues

16%16% 19%19% 13%13%

Inventory and cost of salesInventory and cost of sales 27%27% 19%19% 20%20%

* Includes data for only accelerated filers Source: Audit Analytics

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Ineffective ICFR:Ineffective ICFR:Selected Issues IdentifiedSelected Issues Identified

Year 2Year 2 Year 3Year 3 Year 4*Year 4*

Acctg documentation, policy, and/or Acctg documentation, policy, and/or proceduresprocedures

99%99% 100%100% 100%100%

Acctg personnel resources, Acctg personnel resources, competency, trainingcompetency, training

58%58% 58%58% 63%63%

Untimely or inadequate account Untimely or inadequate account reconciliationsreconciliations

29%29% 27%27% 23%23%

IT, software, security issuesIT, software, security issues 21%21% 23%23% 27%27%

Nonroutine transaction control issuesNonroutine transaction control issues 21%21% 22%22% 16%16%

Segregation of duties/design of Segregation of duties/design of controlscontrols

16%16% 17%17% 12%12%

Journal entry control issuesJournal entry control issues 15%15% 14%14% 10%10%

Ethical compliance issues with Ethical compliance issues with personnelpersonnel

8%8% 7%7% 6%6%

Senior management resources, Senior management resources, competency, reliability issuescompetency, reliability issues

6%6% 6%6% 6%6%

* Includes data for only accelerated filers Source: Audit Analytics

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Frequently Asked QuestionsFrequently Asked Questions



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Non-Accelerated Filers F/S AuditsNon-Accelerated Filers F/S Audits Auditors are not required to evaluate the Auditors are not required to evaluate the

effectiveness of ICFR (i.e., perform an ICFR audit effectiveness of ICFR (i.e., perform an ICFR audit under 404(b))under 404(b)) Does not preclude dialogueDoes not preclude dialogue

What should the auditor do if management does not What should the auditor do if management does not perform an assessment or if management’s perform an assessment or if management’s assessment is believed to be inaccurate? For assessment is believed to be inaccurate? For example:example: Management reaches an incorrect conclusion as Management reaches an incorrect conclusion as

to effectiveness of ICFR to effectiveness of ICFR Management does not disclose all identified Management does not disclose all identified

material weaknessesmaterial weaknesses

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Non-Accelerated Filers F/S Audits (continued)Non-Accelerated Filers F/S Audits (continued) Audit Considerations (e.g. if the auditor identifies Audit Considerations (e.g. if the auditor identifies

deficiencies as part of the financial statement audit):deficiencies as part of the financial statement audit): Understand how management has considered the Understand how management has considered the

information in its assessmentinformation in its assessment Be mindful that management may have Be mindful that management may have

considered compensating controls or other considered compensating controls or other matters in its assessmentmatters in its assessment

If, after understanding management’s response, If, after understanding management’s response, the auditor still believes that management has not the auditor still believes that management has not adequately considered the deficiency, consider adequately considered the deficiency, consider discussion with the audit committeediscussion with the audit committee

Any residual concerns require the auditor to Any residual concerns require the auditor to consider whether management’s assessment consider whether management’s assessment contains a material misstatement of fact, and contains a material misstatement of fact, and follow the guidance outlined in AU 550.06 (SAS 8) follow the guidance outlined in AU 550.06 (SAS 8)

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Staff GuidanceStaff Guidance Staff FAQs address issues such as FIN 46R, equity method Staff FAQs address issues such as FIN 46R, equity method

investments and Type 2 SAS 70 reports.investments and Type 2 SAS 70 reports. SEC Staff speechesSEC Staff speeches

ContactsContacts The SEC's Office of the Chief Accountant is happy to assist The SEC's Office of the Chief Accountant is happy to assist

with Section 404 questions. You can submit a question by with Section 404 questions. You can submit a question by email to email to [email protected]@sec.gov. . More information can be found at:More information can be found at:

http://www.sec.gov/info/accountants/ocasubguidance.htmhttp://www.sec.gov/info/accountants/ocasubguidance.htm For help with other compliance issues of importance to For help with other compliance issues of importance to

smaller companies, visit the Division of Corporation smaller companies, visit the Division of Corporation Finance's Office of Small Business Policy website at Finance's Office of Small Business Policy website at http://www.sec.gov/info/smallbus/reachsec.htmhttp://www.sec.gov/info/smallbus/reachsec.htm, or email us , or email us at at [email protected]@sec.gov..

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Other InitiativesOther Initiatives Other InitiativesOther Initiatives

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Other InitiativesOther Initiatives

SEC Advisory Committee on Improvements to SEC Advisory Committee on Improvements to Financial Reporting (CIFiR)Financial Reporting (CIFiR)

Interactive Data (XBRL)Interactive Data (XBRL) International Financial Reporting Standards International Financial Reporting Standards

(IFRS)(IFRS) US Treasury Advisory Committee on the US Treasury Advisory Committee on the

Auditing ProfessionAuditing Profession

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BackgroundBackground Emanated from concerns about complexity of financial Emanated from concerns about complexity of financial

reportingreporting

Examined the U.S. financial reporting system to identify Examined the U.S. financial reporting system to identify possible improvements possible improvements

Chaired by Robert PozenChaired by Robert Pozen

Composed of preparers, investors, audit committee Composed of preparers, investors, audit committee representatives, auditors, attorneys and regulatorsrepresentatives, auditors, attorneys and regulators

Observed by FASB, PCAOB, IASC, Federal Reserve Observed by FASB, PCAOB, IASC, Federal Reserve Board and Department of TreasuryBoard and Department of Treasury

Issued “developed proposals” in February 2008, final Issued “developed proposals” in February 2008, final recommendations on August 1, 2008recommendations on August 1, 2008

SEC Advisory Committee on Improvements SEC Advisory Committee on Improvements to Financial Reporting (CIFiR)to Financial Reporting (CIFiR)

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Interactive Data (XBRL)Interactive Data (XBRL)

EEXXtensible tensible BBusiness usiness RReporting eporting LLanguageanguageExtensible – allows for customizationExtensible – allows for customization

Business Reporting – Exchange of interactive business Business Reporting – Exchange of interactive business information over the Internetinformation over the Internet

Language – XML-based language for defining Language – XML-based language for defining informationinformation

XBRL is tagged data (machine readable)XBRL is tagged data (machine readable)

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Interactive Data (XBRL)Interactive Data (XBRL)

Proposing Release Phase-InProposing Release Phase-In Largest domestic and foreign accelerated filers that use US GAAP would Largest domestic and foreign accelerated filers that use US GAAP would

provide an additional exhibit containing financial statements, and any provide an additional exhibit containing financial statements, and any applicable financial statement schedules, in XBRL beginning with fiscal applicable financial statement schedules, in XBRL beginning with fiscal periods ending on or after December 31, 2008periods ending on or after December 31, 2008 Approximately 500 largest companiesApproximately 500 largest companies

Companies also would be required to post this information on their Companies also would be required to post this information on their websiteswebsites

All other domestic and foreign large accelerated filers using US GAAP All other domestic and foreign large accelerated filers using US GAAP would phase-in beginning with fiscal periods ending on or after would phase-in beginning with fiscal periods ending on or after December 31, 2009December 31, 2009

All remaining filers using US GAAP and all FPI’s that prepare their All remaining filers using US GAAP and all FPI’s that prepare their financial statements using IFRS, as issued by the IASB, would phase-in financial statements using IFRS, as issued by the IASB, would phase-in beginning with fiscal periods ending on or after December 31, 2010beginning with fiscal periods ending on or after December 31, 2010

The required tagged disclosures would include companies’ primary The required tagged disclosures would include companies’ primary financial statements, footnotes, and financial statement schedulesfinancial statements, footnotes, and financial statement schedules Financial statement footnotes and schedules initially would be Financial statement footnotes and schedules initially would be

tagged individually as block texttagged individually as block text After a year of such tagging, a filer would be required to tag the After a year of such tagging, a filer would be required to tag the

detailed disclosures within the footnotes and schedulesdetailed disclosures within the footnotes and schedules

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International Financial Reporting International Financial Reporting Standards (IFRS)Standards (IFRS)

Significant MilestonesSignificant Milestones April 2005 – SEC staff publishes IFRS “Roadmap”April 2005 – SEC staff publishes IFRS “Roadmap”

March 2007 – SEC staff roundtableMarch 2007 – SEC staff roundtable

July 2007 – Proposing Release on acceptance of IFRS July 2007 – Proposing Release on acceptance of IFRS financial statements without reconciliation to US GAAP financial statements without reconciliation to US GAAP for foreign private issuers (FPIs)for foreign private issuers (FPIs)

August 2007 – Concept Release on allowing IFRS for US August 2007 – Concept Release on allowing IFRS for US issuersissuers

November 2007 – Commission approved elimination of November 2007 – Commission approved elimination of reconciliation to US GAAP by FPIs using IFRS as issued reconciliation to US GAAP by FPIs using IFRS as issued by the IASBby the IASB

December 2007 and August 2008 – SEC staff roundtablesDecember 2007 and August 2008 – SEC staff roundtables

November 2008 – SEC publishes for public comment a November 2008 – SEC publishes for public comment a proposed “Roadmap” for the potential use of IFRS by proposed “Roadmap” for the potential use of IFRS by U.S. issuersU.S. issuers

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Treasury CommitteeTreasury Committee

Objective was to provide advice and Objective was to provide advice and recommendations on the sustainability of a strong recommendations on the sustainability of a strong and vibrant public company auditing professionand vibrant public company auditing professionCommittee was co-chaired by Arthur Levitt Jr. Committee was co-chaired by Arthur Levitt Jr. and Don Nicolaisenand Don NicolaisenThree subcommitteesThree subcommittees

Human CapitalHuman Capital Firm Structure and FinancesFirm Structure and Finances Concentration and CompetitionConcentration and Competition

SEC and PCAOB were official observers of the SEC and PCAOB were official observers of the committeecommitteeIssued final report October 6, 2008Issued final report October 6, 2008

RecommendationsRecommendations

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