By:  Cydney Posner

The SEC has approved the PCAOB's proposed Auditing Standard No. 4, Reporting on Whether a Previously Reported Material Weakness Continues to Exist.  This new standard will apply when auditors report on the elimination of a material weakness in a company's internal control over financial reporting. Under the new standard, a company could elect voluntarily to engage its auditors to perform this function, in the event the company felt the need to reassure the investing public. In approving the standard, the SEC stated its view that the rules provide a reasonable format for assessing whether a material weakness in a company’s internal controls that has been, or is being, reported to investors continues to exist. However, to facilitate implementation of the standard, the SEC expects the PCAOB, within 90 days of the issuance of the order, to issue a clear and concise outline of the affirmative audit steps set forth in the standard.

During the comment period, some commenters requested guidance on questions regarding the acceptable forms for use in filing management’s report and the auditor’s report. In response, the SEC noted:

  • Since the report is voluntary, if an issuer wishes to publicly disseminate the reports of management and the auditor on whether a previously reported material weakness continues to exist, an issuer can use any Exchange Act form it believes to be appropriate.
  • The SEC rules do not specify the form of disclosure that management should use when describing the circumstances surrounding the remediation of a previously reported material weakness. As a result, general disclosure principles and requirements would apply. However, the disclosure should not amend management’s conclusion on the effectiveness of internal control over financial reporting as of the end of the fiscal year (under SOX 404). In addition, management can conclude that internal control is effective as of the time of remediation of a material weakness (or as of any other time) only if an assessment of effectiveness pursuant to those rules is performed at that time.
  • If the remediation was completed between the end of the fiscal year and the filing of the Form 10-K, management may include a single, combined report on the results of the annual assessment of internal control over financial reporting and the subsequent conclusion related to the remediation of a material weakness identified in the annual assessment.

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