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Editor: Recently the SEC and the PCAOB accorded small companies and foreign issuers some leeway in their reporting requirements under Sarbanes-Oxley. Briefly review the current situation regarding filing and reporting requirements for non-accelerated companies.

Schroeder: The SEC amended the compliance date for non-accelerated filers so that the first time that they need to prepare management’s assessment of the effectiveness of their company’s internal control over financial reporting will be for fiscal years ending on or after 12/15/2007. In the following year, these same companies will be subject to the Auditors Attestation over their Sarbanes-Oxley reporting requirements.

Editor: When should non-accelerated filers call their accountants in to check their internal controls to make sure that they are in compliance by the first reporting day?

Schroeder: By now, all non-accelerated filers should have at least started discussions with their external auditors as to their plans for SOX compliance, making sure they understand their auditor’s expectations for design of controls as soon as possible. Also, it is important that management enable their auditors to understand and get comfortable with their internal control for financial reporting. In the spirit of Accounting Standard 5 (AS 5), the external auditors will be able to leverage management’s testing where feasible, thereby lowering the time and effort required for the external audit.

Editor: Do you feel that these changes are adequate – especially for the smaller filers?

Schroeder: On balance, our clients are comfortable with AS 5 and believe it is a very positive response to criticisms about AS 2. AS 5 provides a framework management can use to tailor their financial controls to effectively meet their business needs. The real challenge for management is to understand AS 5 and internal control concepts in order to maximize the usefulness of AS 5 in rationalizing their controls and ensuring that they effectively comply with section 404 of SOX.

Editor: The three capital market study groups recently presented their responses to ways in which the capital markets could be improved. They suggested several changes, one of which is the convergence of U.S. GAAP with IFRS. What is your firm’s position on this important step?

Schroeder: Our firm believes the convergence of U.S. GAAP and IFRS is on balance a positive change, albeit there is a significant amount of work needed to enable this. For example, current U.S. GAAP is approximately 25,000 pages of standards and guidance, while IFRS has approximately 2,500 pages. We believe that one global standard is necessary and we are undergoing the educational process to understand this new international GAAP.

Editor: How can accounting firms and others make clear to the public that expectations about the degree of precision of financial reports is not to be taken so literally that 100 percent accuracy is required?

Schroeder: The current auditors report indicates that the financial statements present fairly in all intended aspects in accordance with generally accepted audit principles. This opinion does not give 100 percent reliance due to the concept of mutuality.

Editor: Should Congress focus Section 10A liability on material omissions and misstatements or where the liability applies only to statements implicating management integrity?

Schroeder: Congress should consider the accounting performance overall and have liability caps for unintentional misapplication of GAAP.

Editor: What steps should be taken to build a more robust accounting profession?

Schroeder: To build a more robust accounting profession it is important to: 1) Attract the best accounting students to accounting firms, where now it seems many recent grads are focusing their career paths toward the financial industry, 2) have liability caps be institutionalized, and 3) develop standards that are less complex.

Editor: How do you go about looking into the integrity of management whose statements you must rely on to do the audit?

Schroeder: Our client acceptance process begins with a thorough background check on the company and its management team. The first key step of our audit process is to understand and assess the adequacy of entity or management level controls that serve to prevent and detect errors or fraud. So we look closely at the role of the audit committee and board oversight, we look at the role and the capabilities of the CEO and CFO to oversee the entire financial process. We try to understand the nature of a business and status of its financial situation as to whether there are conditions that would tend to correlate with fraud or that might provide an incentive for fraud. Are there anti-fraud controls in place? Those are all key elements of understanding the extent to which we can rely upon management and the role that it plays in financial governance.

Editor: When auditors request statements from corporate counsel about contingent liabilities, there are cases where this has been treated by the courts as a waiver of the attorney-client privilege. In your experience, has this ever been a problem?

Schroeder: To date this has not been a problem.

Please email Dan Schroeder with questions about this interview.