Should U.S. Issuers Have the Option to Prepare Financial Statements in Accordance with International Financial Reporting Standards, Instead of U.S. GAAP?

Posted on August 14, 2007 by Porter Wright

The SEC believes that the global capital markets and investors could benefit from globally accepted accounting standards, and is therefore considering permitting U.S. issuers to prepare financial statements in accordance with International Financial Reporting Standards, as opposed to generally accepted accounting principles as used in the United States.

In its concept release, the SEC explains its long-standing desire to minimize disparity between the U.S. accounting and disclosure methods and those of other countries. Minimizing such disparity may encourage and facilitate expansion of capital markets across borders while simultaneously affording sufficient disclosure to protect investors.

Currently, the Financial Accounting Standards Board and the International Accounting Standards Board are working together toward converging U.S. and international accounting standards. The SEC acknowledges the risk that each Board may slow convergence efforts if U.S. issuers are permitted to use International Financial Reporting Standards to prepare financial statements. This is just one of the many considerations the SEC is seeking comment on in its concept release.

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New Audit Standard for Internal Controls

Posted on May 25, 2007 by Porter Wright

One day after the SEC approved interpretive guidance to assist management in creating a process for evaluating internal controls over financial reporting, the PCAOB adopted Auditing Standard No. 5, An Audit of Internal Control over Financial Reporting that Is Integrated with an Audit of Financial Statements. This new standard replaces Auditing Standard No. 2. 

The PCAOB collaborated with the SEC to ensure Auditing Standard No. 5 is consistent with the SEC’s interpretive guidance. Mark Olson, PCAOB Chairman, indicated that, similar to the SEC’s interpretive guidance, the “new standard is more risk-based and scalable.” The new standard requires that auditors report to the audit committee any control deficiencies that are important, even though they may not constitute a “material weakness.” Thus, while eliminating unnecessary procedures and costs, the new standard is designed to increase the chances of finding material weaknesses in internal controls before such material weaknesses have a material effect on a company’s financial statements. 

The standard is effective for audits performed during fiscal years ending on or after November 15, 2007, but the PCAOB encourages auditors to comply with the new standard once it is approved by the SEC.

The PCAOB is developing guidance for auditors of smaller companies to apply the new standard.

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