How to Comply With Sarbanes-Oxley Section 404: Assessing the Effectiveness of Internal Control

PREFACE

I wrote the first edition of this book in the spring of 2003. The Public Company Accounting Oversight Board's Accounting Standard 2 was still being drafted. Advocates of shareholders, preparers, and the auditing profession were all vigorously advancing their points of view. It was like the Wild West out there, each of us a newcomer trying to create a home in a foreign, sometimes hostile new frontier. Good times, good times.

Much has changed since then. Collectively, we have become much more knowledgeable about internal controls and how they affect the reliability of financial reporting. This growth in knowledge has put us on a path to achieve the goal that Sarbanes-Oxley originally set out to achieve: a regulatory oversight system that ensures the reliable reporting of a wide variety of information that investors need to make decisions.

Finding this path has not been easy. Initial compliance costs have been much higher than originally anticipated. The relative complexity of AS2 certainly contributed to the high cost, but let's not forget the post-Enron zeitgeist and the overall sense that it was too risky to make judgments about how the auditing standard should be applied to the facts and circumstances of specific situations. When in doubt, we did more.

The Securities and Exchange Commission and PCAOB have just approved new guidance to address these issues of complexity and the cost of compliance. This guidance is not so much a rejection of AS2 as it is a refinement of ...