Federal regulators issued guidelines yesterday that allow flexibility for companies and accounting firms in implementing key provisions...

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WASHINGTON — Federal regulators issued guidelines yesterday that allow flexibility for companies and accounting firms in implementing key provisions of a landmark anti-fraud law. The rules could reduce a perceived compliance burden that has fueled complaints from many companies.

“It is clear to us that the internal-control assessment and audit process has the potential to significantly improve the quality and reliability of financial reporting,” said William McDonough, chairman of the independent board that oversees the accounting industry. “At the same time, it is equally clear to us that the first round of internal-control audits cost too much.”

The statements released by the Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board come as key requirements of the 2002 law born of corporate scandals, the Sarbanes-Oxley Act, have been getting critical scrutiny.

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Legions of companies have complained that the law’s rules mandating stronger internal financial controls are too burdensome and costly and should be eased. Smaller public companies have been the most vocal, and their executives have found a sympathetic ear in Congress, where there are rumblings of possible changes to the anti-fraud law.

The SEC, in a statement by its staff, stressed “the responsibility of management to determine the form and level of controls appropriate for each company and to scope their assessment … accordingly.”

Accounting firms, in reviewing companies’ internal controls, “should recognize that there is a zone of reasonable conduct by companies that should be recognized as acceptable,” the statement said.

Companies’ internal controls over their financial reporting “should reflect the nature and size of the company to which they relate,” it said, and should be tailored to the operations of smaller companies.

In addition, it said, there should be a “frequent and frank dialogue” among company managers, outside auditors and the audit committees of boards of directors with a view to improving internal controls and the quality of financial reports.

The Public Company Accounting Oversight Board, in its guidelines, said that accounting firms should exercise their good judgment “to tailor their audit plans to the risks facing individual” companies that they audit rather than using boilerplate “checklists” for their reviews. The auditors are urged to use a risk-based approach.

Companies across a number of industries quickly praised the regulators’ actions.

“This new guidance will help our member companies save money and ease the unnecessary and unfair burden Sarbanes-Oxley … has placed on companies of all sizes,” said William Archey, president and CEO of AeA, a trade group representing 2,500 U.S. high-tech companies. “Among other things, today’s guidance stresses the importance of professional judgment by external auditors, something that has been missing during what has become a ‘check-the-box’ process.”

The regulatory moves came a day after Federal Reserve Chairman Alan Greenspan defended the 2002 anti-fraud law.

“I am surprised that the Sarbanes-Oxley Act, so rapidly developed and enacted, has functioned as well as it has,” Greenspan said in a speech to the graduating class of the University of Pennsylvania’s Wharton School. He acknowledged that the law “will doubtless be fine-tuned as experience with the act’s details point the way.”

In March, the SEC gave smaller U.S. corporations and all foreign companies whose stock trades on U.S. exchanges an extra year, until July 15, 2006, to meet the requirement to file reports on the strength of their internal controls.