The SEC announced yesterday that it unanimously approved a new auditing standard and other measures intended to increase the accuracy of financial reports while reducing unnecessary costs, particularly for smaller public companies.

The Commission is hoping that this new management guidance, Auditing Standard No. 5 (which replaces Auditing Standard No. 2), will make Section 404 audits and management evaluations more risk-based and scalable to company size and complexity. The four elements of Auditing Standard No. 5 that SEC feels will have the greatest impact are that is (1) is less prescriptive, (2) makes the audit scalable (so it can change to fit the size and complexity of any company), (3) directs auditors to focus on what matters most and eliminates unnecessary procedures from the audit, and (4) includes a principles-based approach to determining when and to what extent the auditor can use the work of others.