The New 404 Balancing Act: Assessing Choices, Making the Right Decision

Since the passage of the The Sarbanes-Oxley Act of 2002, it has been no secret that implementing the provisions of Section 404 has been expensive, and has consumed considerable time and resources from public companies in the U.S. With help from their auditors and other professional advisors, most companies have by now acclimated themselves to the almost year-round internal controls (IC) assessment process, and extensive IC testing that Section 404 requires.

The uncertain regulatory environment of the past three years has caused some companies to implement IC reporting programs that might go beyond what is needed for reasonable assurance. Long-awaited SEC guidance removes the uncertainly about how flexible management can be in its efforts to implement 404 programs. The guidance creates an opportunity for management to rethink its programs by sharpening its focus on areas of highest financial reporting risk. Management should not underestimate the importance of this opportunity to re-evaluate and transform its 404 programs.