The brave new world of internal controls

The brave new world of internal controls
March 25, 2015

Until recently, treasury and FP&A teams have participated on the periphery of the annual audit process. But times have changed, and their roles in the process are in the spotlight. Rising audit failures are to blame.

Welcome to the brave new world of internal control.

In the first few years following the Sarbanes-Oxley (SOX) Act of 2002, the Public Company Accounting and Oversight Board (PCAOB) found problems with approximately 15 percent of the audits it inspected. In 2014, the PCAOB’s inspection reports showed an average failure rate for Big Four audit firms of over 39 percent, with two firms reaching 46 and 49 percent.

The problem: documentation
At the center of these failures is insufficient documentation by the client. Auditors were unable to collect, organize, and present the necessary evidence because of lack of documentation by the individuals preparing it in the first place.

Impact on treasury and FP&A teams
For treasury and FP&A teams to survive this new environment, their company's documentation will need to be significantly improved.

The burden on teams may be great. Increased scrutiny by the PCAOB and SEC on internal controls will increase the burden on teams as they try to meet the demand for more complete and detailed documentation.

How will you cope?
Audit firms are beginning to ask more aggressive questions, demanding substantially more evidence that internal controls are well designed and operating effectively, but there still is a problem.

Even when companies have well-designed, effective controls, they often don’t have the documentary evidence to give their auditors in a readily accessible and usable form.

Here are three tips to handle help your team prepare accurate and accessible documentation:

  1. Take increased scrutiny seriously and discuss expectations with your team
  2. Ensure the treasury and FP&A teams understand requirements for documenting key assumptions and significant transactions, and for assessing historical accuracy of past projections
  3. Reduce the burden, and take advantage of new business reporting technologies

Much of the pressure from the PCAOB and SEC will fall on the treasury and FP&A teams. Those teams that are prepared will survive in this brave new world. Read the full article, Brave New World of Internal Control.

Mike Sellberg

About the author

Mike Sellberg is Executive Vice President and Chief Product Officer at Workiva. He is the former EVP and CTO at iMed Studios and the former Divisional General Manager at Engineering Animation, Inc.