Sarbanes-Oxley Act: Section 404 Practical Guidance for Management* July 2004
This monograph is designed to assist management in its efforts to satisfy its responsibilities established by the Public Company Accounting Reform and Investor Protection Act of 2002. The monograph is based on rule-making and guidance available as of July 2, 2004; accordingly, as new rules or modiﬁcations or interpretations to existing rules emerge, certain aspects of this monograph may become obsolete. Because interpreting this guidance is proving to be an evolutionary process, preparers and users are cautioned to carefully evaluate and monitor further implementation guidance from the Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB). PricewaterhouseCoopers will continue to monitor regulatory activities, company interpretations, and evolving practices; we will update our policies and will issue updated perspectives as warranted. In providing the information contained in this monograph, PricewaterhouseCoopers is not engaged in rendering legal, or other professional advice and services. As such, this monograph should not be used as a substitute for consultation with professional, legal, or other competent advisors.
To Our Clients and Friends:
The Public Company Accounting Reform and Investor Protection Act of 2002 (the Act or the Sarbanes-Oxley Act) requires public companies to develop new practices involving corporate governance and financial reporting with the objective of restoring the public trust in the capital markets. One of the most challenging aspects of the Act’s requirements involves a company’s responsibilities for internal controls. Entitled Management Assessment of Internal Controls, Section 404 of the Act (Section 404) stipulates that public companies must take responsibility for maintaining an effective system of internal control, in addition to reporting on the system’s effectiveness. The Act requires most public companies (i.e., accelerated filers that meet certain market capitalization requirements) to report annually on the company’s internal control over financial reporting for fiscal years ended on or after November 15, 2004. The majority of the remaining public companies, including foreign private issuers, will be required to comply with these requirements for fiscal years ended on or after July 15, 2005. While Section 404 poses numerous challenges for preparers, users, and external auditors – both in implementing the mandate and understanding its implications – this monograph is primarily designed to address the challenges facing preparers. We fully recognize that implementation, particularly in the critical first year, will present preparers with many challenges, complexities, and new costs. However, for the benefits of Section 404 to be realized by all of the participants in the capital markets, a substantial effort will be needed. A thorough assessment and evaluation of internal control over financial reporting will go a long way to achieving a fundamental objective of Section 404: restoring investor confidence in financial reporting. This monograph is presented to you in that spirit. The monograph is one in a series of publications1 that we have issued in relation to the Sarbanes-Oxley Act. This monograph describes the key activities integral to a successful Section 404 assessment process including, among others, scoping, documenting, testing, evaluating, and reporting. It reflects the insights and perspectives we have gained by working with our clients and obtaining input from the many PricewaterhouseCoopers’ partners and staff who have concentrated significant amounts of time on understanding this new reporting model. We provide our observations and analysis, note the lessons we have learned from recent experiences with clients, and offer examples that illustrate specific aspects of Section 404. We are pleased to share our...
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