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The perfect storm of internal controls


The perfect storm of internal controls
February 11, 2015

We are currently in a 'perfect storm' in the area of internal control over financial reporting, which demands effective action by all participants in the financial reporting and auditing chain.

— Jeanette Franzel, Board Member of the PCAOB, Institute of Internal Auditors 2014 General Audit Management Conference speech

According to Franzel, there have been several reporting cycles over the past few decades in which management and internal and external auditors simply didn't get it right. The results left us struggling to define, understand, implement, and assess internal controls.

To add to the tension, the SEC has sent comment letters on deficiencies in internal controls over financial reporting. At the AICPA’s Annual Conference on Current SEC Developments, Chuck Landes, AICPA Vice President and COSO Board Member said, “If organizations have not transitioned—and not for good sound business reasons—I would think about whether or not that impacts my assessment of controls in tone at top.”

How do we work together as a finance community to combat the storm? Here are a few ideas.

Internal auditors and management need to take a look at the updated 2013 COSO Framework in conjunction with responding to any PCAOB inspection findings associated with deficient audits.

The pressure is mounting on auditors and, in turn, you and your company. Framework updates, quality evidence, and internal control over financial reporting all play a big role in Franzel's 'perfect storm.'

With the increased scrutiny of external auditors, companies should construct a sound strategy and process for documenting and testing internal controls. In order to develop a better process, companies should provide evidence of activities that demonstrate the right tone at the top, document their controls and activities, and improve communications with and the quality of the documentation provided to auditors. This is the only way to make more time for analysis.

The PCAOB and SEC are watching more closely than ever. In this white paper, Joseph Howell, Workiva Executive Vice President for Strategic Initiatives, shows you just how to handle all of the moving parts in these inspection reports. See what he calls "good news" when it comes to internal controls.

Mike Starr
Vice President, Governmental and Regulatory Affairs

About the Author

Mike Starr is Vice President of Governmental and Regulatory Affairs. He previously served as the SEC Chief Accountant’s advisor with a focus on investors’ financial information needs and the role of structured data in meeting those needs. Prior to his work with the SEC, Mike served as Chief Operating Officer for Grant Thornton International Ltd., where he oversaw global strategy and public policy. He earned a Bachelor of Science in accounting from Oklahoma State University (OSU), and in 2010 was recognized as an OSU distinguished accounting alumnus and inducted into the School of Accounting Hall of Fame.

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