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The AAO Weblog covers accounting issues and current events as they relate the practice of investment analysis.

Feb 8

Written by: Jack Ciesielski
2/8/2005 8:50 AM 

Yesterday, the SEC announced that it would hold a roundtable discussion in April (tentatively) on the experiences of registrants and accounting firms in their first year reports on internal control as required by the much-reviled Section 404 of the Sarbanes-Oxley Act. It also expects to gather written feedback as well. By April, the majority of internal control reports will be long issued; hopefully, investors will have done some meaningful interpretation of the reports by that time as well.

Given the general corporate negativism towards the rule, and the intended pushback of the rules from groups like the U.S. Chamber of Commerce, the roundtable is likely to be one long session of bitter kvetching. It will be interesting to see what the SEC does with the input it receives. Will it take the comments as marching orders for downsizing the internal control requirements? Or will it simply listen to its constituents, weigh the validity of their comments, and perform only minor surgery on the rules?

It remains to be seen, of course. There's one fundamental factor in favor of those registrants who come to gripe, however, and that is that it's simple to express your costs for complying with Section 404. Firms will easily point to dollars and hours spent in complying with the rule, and allege that no benefits stemmed from those efforts. And that is something that makes an impression on people.

The benefits are real, but they are invisible. In fact, the entire Section 404 fracas can be paraphrased handily in the context of a MasterCharge commercial:

“Cost of Section 404: millions of dollars.”
“Increased audit fees: more millions.”
“Investor confidence in firms and markets: priceless.”

The SEC will certainly hear from registrants and auditors about the costs of Section 404. Let's hope they try to find investors' side of the story as well.