COSO News; Reform Of Financial Reporting?

The authors of the most entrenched framework for establishing internal control over financial reporting are planning to issue more guidance on how companies can monitor controls on an ongoing basis to make their compliance efforts more efficient.

One central component of the COSO model—crafted by the Committee of Sponsoring Organizations and widely used to facilitate compliance with the Sarbanes-Oxley Act’s Section 404 requirements—is monitoring, says COSO Chairman Larry Rittenberg. “It’s saying once you’ve designed an effective internal control system, the last component should be to set up a process to continuously monitor effectiveness of controls going forward,” he explains.

Doing that has not been easy for many businesses, so COSO wants to give them fresh help on how to do so. The Committee is accepting proposals from consulting firms, audit firms, and others that want to help draft such guidance for COSO to present to the market, with the goal of having a definitive document ready to publish by the end of 2007, Rittenberg says.

Rittenberg

The first step will be a white paper to better define the concept of monitoring controls and to draw a clear distinction from monitoring financial performance; Rittenberg says the two terms are “sometimes … confused in practice.” COSO hopes to publish a white paper in the spring and draft guidance in the summer, followed by an exposure draft, comment period, and final document by the end of the year.

COSO officials hope the guidance will profile live examples where companies are effectively monitoring controls in ways that facilitate efficient SOX compliance. “We want to bring forward the concept as well as identify best practices,” Rittenberg explains. The guidance should be applicable to large and small companies alike, he adds.

Financial preparers have told regulators they would like to see more guidance on how an ongoing monitoring effort would enable them to escape some of the onerous testing and documentation contained in Auditing Standard No. 2, which governs how external auditors inspect companies’ internal control over financial reporting. The Securities and Exchange Commission and the Public Company Accounting Oversight Board are working on management-focused guidance and a rewrite of AS2 to achieve just that; both pieces of guidance are expected before the end of the year.

“We would hope if we in fact carry out the project in the way we intend, that the effectiveness of management’s monitoring of controls would be something the external auditors can also look at in performing their assessment of internal control,” Rittenberg says.

While COSO’s recent guidance for how to apply the COSO framework to smaller companies was prompted by a request from the SEC, the current project to establish monitoring guidance is of COSO’s own initiative, Rittenberg says. “This is something the board has been discussing for a good part of a year, but we needed to get the small business guidance out before we could go on with new guidance.”

Accounting Firms Call For Global Reporting Reform

The world’s largest auditing firms have issued a joint report calling for a dramatic overhaul of financial reporting and capital market regulation, to allow a more responsive, real-time climate that better reflects the realities of a global marketplace and investor demand for information.

The heads of the Big 4 firms—Deloitte & Touche, Ernst & Young, KPMG, and PricewaterhouseCoopers—as well as second-tier firms Grant Thornton and BDO Seidman issued their 24-page report at the Global Public Policy Symposium in Paris last week. Titled “Global Capital Markets and the Global Economy,” the report calls for a principles-based reporting regime that gives investors faster access to more consistent, reliable, and relevant information; a convergence of audit standards and regulation; and relief from network liability for the wrongdoings of individuals.

The audit-firm leaders say current reporting models ignore the modern complexities of the global marketplaces and the companies that do business there, nor do they reflect the current demand for instant information. “The same forces that are reshaping economics at all levels are driving the need to transform what kind of information various stakeholders want from companies, in what form and at what frequency,” the report says. “The future of auditing in such an environment lies in the need to verify that the process by which company-specific information is collected, sorted and reported is reliable and the information presented is relevant for decision-making.”

The leaders say the audit profession wants to help, but is blocked by several barriers: unrealistic expectations about the amount of assurance an audit is supposed to provide; challenges in hiring and training talent; and legal and regulatory regimes that come down harshly on auditors.

The report says in the short term, the market needs accounting standards to converge on a principles-based system. “Complex rules must be resisted and withdrawn,” the chief executives and chairmen wrote. “Today’s rules can produce financial statements that virtually no one understands.” The report also calls for the convergence of auditing standards and regulation.

Over the longer haul, the accounting chiefs say, the market needs more nonfinancial, even industry-specific information, customized to users, and accessible “far more frequently” than the current system of quarterly reports.

“Audit networks cannot provide the services demanded without the requisite financial, technical and people resources,” the executives wrote. “Audit firms and their global networks are not insurance companies. Legal and regulatory systems must reflect this reality. Individual auditors who engage in wrongdoing must be punished but without threatening the financial viability of their firms.”

IFAC Committee Reworks Code Of Ethics Guidance

The International Federation of Accountants is looking for feedback on its efforts to establish guidance on how companies can develop and implement a corporate code of conduct.

The guidance highlights the various roles professional accountants play in business in driving and supporting ethics throughout the organization and in conducting ethics programs. It also gives practical guidance on how to design and develop a code of conduct.

IFAC’s Professional Accountants in Business Committee first published the draft, “Defining and Developing an Effective Code of Conduct,” in January. The revised version represents a significant rework based on comments to the initial draft, IFAC said. The recent draft recommends an approach to ethics based on establishing a values-based organization and a values-driven code of conduct.