• SEC Final Rules Adopted Pursuant to Sarbanes-Oxley Act of 2002 -- Retention of Records Relevant to Audits and Reviews
  • July 2, 2003 | Author: Timothy M. Sullivan
  • Law Firm: Hinshaw & Culbertson LLP - Chicago Office
  • On January 22, 2003, the SEC adopted Rule 2-06 of Regulation S-X to implement Section 802 of the Sarbanes-Oxley Act of 2002.

    Documents to be retained. Accounting firms will be required to retain records relevant to the audits or reviews of issuers' and registered investment companies' financial statements, including "workpapers" and other documents that form the basis of the audit or review, and memoranda, correspondence, communications, other documents, and records (including electronic records), which are created, sent or received in connection with the audit or review, and contain conclusions, opinions, analyses, or financial data related to the audit or review (Rule 2-06(a)).

    Time of retention. The records will have to be retained for seven years after the auditor concludes the audit or review of the financial statements (Rule 2-06(a)). In a previous release, the SEC had proposed that such records be retained for five years from the end of the fiscal period which an audit or review was concluded. This change will coordinate the SEC's rule with the forthcoming auditing standards from the Public Company Accounting Oversight Board (the "Board"), which will require the retention of audit documentation for seven years.

    Workpapers. The term "workpapers" will be defined as those documents that record the audit or review procedures performed, the evidence obtained, and the conclusions reached by the auditor (Rule 2-06(b)). The definition will recognize that the PCAOB may establish auditing standards further defining the term.

    Differences of Opinion. Proposed Rule 2-06(c) stated that records should be retained if they support or "cast doubt" on the final conclusions reached by the auditor. An example of records that "cast doubt" on an auditor's conclusions would be "documentation of differences of opinion concerning accounting and auditing issues."

    In adopting Rule 2-06, the SEC noted that a number of commenters felt that the proposed "cast doubt" language could be unworkable and could lead accounting firms to retain documents related to virtually every exchange of ideas on any topic. The "cast doubt" language has been replaced with a requirement to keep records that either support the auditor's final conclusions or contain information or data, relating to a significant matter, that is inconsistent with the final conclusions of the auditor on that matter or on the audit or review (Rule.2-06(c)). The rule also states that the documents and records to be retained include, but are not limited to, those documenting consultations on, or resolutions of, differences in professional judgment.

    The compliance date for these rules is October 31, 2003.