Anti-fraud law gains flexibility

WASHINGTON — Federal regulators issued guidelines Monday that allow flexibility for companies and accounting firms in implementing key provisions of a landmark anti-fraud law. The rules could reduce a perceived compliance burden that many companies have complained about.

“It is clear to us that the internal-control assessment and audit process has the potential to significantly improve the quality and reliability of financial reporting,” said William McDonough, the chairman of the independent board that oversees the accounting industry. “At the same time, it is equally clear to us that the first round of internal-control audits cost too much.”

The statements released by the Securities and Exchange Commission and the Public Company Accounting Oversight Board come as key requirements of the 2002 law born of corporate scandals, the Sarbanes-Oxley Act, have been getting critical scrutiny. Legions of companies have complained that the law’s rules mandating stronger internal financial controls are too burdensome and costly and should be eased. Smaller public companies have been the most vocal, and their executives have found a sympathetic ear in Congress — where there are rumblings of a possible legislative fix to the anti-fraud law.

The SEC, in a statement by its staff, stressed “the responsibility of management to determine the form and level of controls appropriate for each company and to scope their assessment … accordingly.”

Accounting firms, in making their reviews of companies’ internal controls, “should recognize that there is a zone of reasonable conduct by companies that should be recognized as acceptable,” the statement said.

Companies’ internal controls over their financial reporting “should reflect the nature and size of the company to which they relate,” it said, and should be tailored to the operations of smaller companies.

In addition, it said, there should be a “frequent and frank dialogue” among company managers, outside auditors and the audit committees of boards of directors with a view to improving internal controls and the quality of financial reports.

The Public Company Accounting Oversight Board, in its guidelines, said that accounting firms should exercise their good judgment “to tailor their audit plans to the risks facing individual” companies that they audit.