Yesterday the Public Company Accounting Oversight Board (PCAOB) issued its
response to concerns that Sarbanes Oxley Section 404 requirements were onerous,
unwieldy, and just too expensive. The PCAOB published a policy
that affirmed the goals and requirements in the regulations
implementing Section 404, which requires that public companies have effective
internal controls over financial reporting and requires that an independent
auditor provides an opinion regarding the effectiveness of these controls. No
surprise there. 

What was more interesting and important was that the PCAOB did acknowledge
that many first year audit efforts were inefficient and too expensive. The
important parts of the statement called for a top-down, rather than bottom-up,
approach to internal control assessment. The PCAOB also made important
clarifications about the kinds of interactions between auditors and the
companies that they audit that are permissible and useful.

Understanding this business about "top-down" and
"bottom-up" is easier if you put it in the context of how auditing
practice has developed over time. Without that big picture perspective, Section
404 and the PCAOB statements sound like a lot of accounting jargon. But, given
the perspective, it is easier to see that we are talking about some fundamental
changes–and about expense and confusion emerging from not getting the changes
right during this past year.

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