Nasdaq says that incremental progress has been made to improve internal control reporting requirements (Sarbanes-Oxley Section 404) via the PCAOB’s proposed Auditing Standard No. 5 (AS5), which addresses internal control auditing standards.

However, it also believes AS5 has not provided the needed clarity or the tools to alleviate the root cause of unnecessarily onerous and costly auditing processes.

The exchange says that the benefits of the legislation have been proven — among them greater transparency, accountability and improved corporate governance. However, to alleviate complaints and support the use of smart controls Nasdaq recommends the further refinement of AS5 prior to its implementation.

Nasdaq recommends:

  • changing the auditor’s role to focus on evaluating the effectiveness of management’s internal controls program, rather than the effectiveness of individual controls, which are the primary driver for auditor fees;
  • a clearer, more workable definition of materiality needs to be established to assist management and auditors alike; establish an “Ombudsman” office in PCAOB to serve as an advocate for issuers who feel their internal controls are being over-audited;
  • establish a clear policy against over-auditing including a fine schedule against auditors, if necessary;
  • allow companies with no material weaknesses to perform the auditor portion of 404 in alternate years;
  • eliminate the notion that auditing firms need to focus on controls for interim financial statements; and
  • raise relief for smaller companies by focusing on “smaller” companies, not just “smaller and less complex” companies.

“Lack of clarity combined with the complexity of today’s global capital markets creates a fundamental issue in applying Section 404 that has not been adequately addressed through Accounting Standard No. 5. We need to provide companies and accounting firms with the tools they need to make 404 more workable,” said Bob Greifeld, president and CEO of Nasdaq. “We also believe companies should be able to voice claims of over-auditing. Currently there is no mechanism in place to do so. We are proposing an Ombudsman office at the PCAOB to provide such an outlet.”

Michael Oxley, Nasdaq’s vice chairman and co-author of Sarbanes-Oxley commented, “Good governance depends on good controls and bright line standards. While AS5 represents improvement over the previous standard, it does not go far enough to help decrease regulatory complexity and reduce the risk for overzealous auditing. We must take bolder steps to make our markets more attractive and competitive.”