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Novel Definitions of "Internal Control" Under Sarbanes-Oxley

April 6, 2005

John Berlau of CEI writes in National Review of some little known aspects of the Sarbanes-Oxley Act:

"one section of the law threatens to become the most extensive day-to-day regulation of American business since FDR's National Industrial Recovery Act, the price-and-output regulatory scheme struck down by a unanimous Supreme Court in 1935. Just as the NIRA created industry boards that had to approve prices and output, Sarbanes-Oxley's Section 404 and its regulatory extensions mandate that the most minute bookkeeping practices have to be okayed by auditors."

The definition of internal control has proven to be highly subjective. The Private Company Accounting Oversight Board has determined that "such things as the technology used to derive accounting numbers must be audited every year by the accountants…One public company's chief financial officer says this could mean that an auditor could label a computer with Windows 97, rather than an updated version, a bad internal control."

The subjective nature of SOX' definition of "internal control" has drawn the attention of some interest groups. The Rose Foundation for Communities and the Environment has called on the PCAOB to mandate that "independent auditors include reviewing the financial impacts of environmental conditions and environmental liabilities as part of their scope." This wide ranging definition could include forcing firms to estimate the affects of "global warming" or other environmental scares, inserting green propaganda into mandated financial statements.

Link for NR subscribers.

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