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The proposed new standard on internal control is a principles-based standard designed to focus the auditor on the most important matters, increasing the likelihood that material weaknesses will be found before they cause material misstatement of the financial statements. The proposal also drops a required evaluation of management's process for assessing controls, urges more reliance on past audits, and allows scaled down audits for small companies.

The proposed standard is down to about 60 pages from the existing standard's roughly 180 pages. It would replace the board's existing internal control standard, Auditing Standard No. 2. 

"The PCAOB's proposed auditing standard is a welcome development, and we look forward to reviewing it carefully," said Conrad Hewitt, chief accountant for the Securities and Exchange Commission.

Section 404 requires companies to disclose more about their internal controls. Since its inception it has received increased scrutiny from businesses and lawmakers who believe the regulatory requirements are too costly, especially for small business.

"Today's proposal is the result of the PCAOB's experience with the first two years of auditors' implementation of the internal control provisions of the Sarbanes-Oxley Act," said PCAOB Chairman Mark Olson. "The board's goal has been to apply the feedback we've received and our observations of implementation to create an auditing standard that preserves the intended benefits without resulting in unnecessary effort and costs. We believe the new standard will result in audits that are more efficient, risk-based and scaled to the size and complexity of each company."

In addition to the proposed internal control standard, the board also proposed for public comment a new auditing standard on considering and using the work performed by internal auditors, management and others in an integrated audit of financial statements and internal control, or in an audit of financial statements only. This proposed standard is intended to further clarify how and to what extent an independent auditor may use that work to reduce the work the auditor otherwise would have to perform.

Also, the board proposed to revise the independence requirement that currently is embedded in the text of AS No. 2, which requires the auditor to seek specific pre-approval by the audit committee of any internal control related service.

"A principal focus in developing this proposal was to retain and strengthen the substantial benefits investors have received from improved internal control over financial reporting," said Tom Ray, PCAOB Chief Auditor and Director of Professional Standards. "I believe we have proposed a standard that will achieve that objective while reducing audit effort, especially for smaller companies."

PCAOB seeks comments on the proposed standard and other proposals for 70 days. Following the close of the comment period on Feb. 26, 2007, the board will determine whether to adopt a final standard. Any final standard adopted will be submitted to the Securities and Exchange Commission for approval.

The proposed standard and related documents are available on the PCAOB's Web site, www.pcaobus.org under Rulemaking Docket 21.