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News < Back Sarbanes Oxley : COSO : Internal Controls COSO Releases Small Business Guidance Exposure Draft For Control Framework Implementation to Support SOX 404 Compliance Efforts
This guidance, which serves as a supplement to COSO?s Internal Control ? Integrated Framework, originally published in 1992, focuses on the unique needs of smaller organizations in regard to compliance with Sarbanes-Oxley (SOX) section 404. COSO?s new guidance outlines 26 fundamental principles associated with the five key components of internal control: control environment, risk assessment, control activities, information and communication; and monitoring. The report defines each principle and examines its attributes, lists a variety of approaches smaller companies can use to incorporate the principle, and includes real-world examples of how smaller companies have effectively applied the principles. A project task force, overseen by Task Force Chair Debbie Lambert and COSO Chairman Larry Rittenberg, and led by PricewaterhouseCoopers (PwC) Partner Miles Everson, consisted of approximately 20 members with experience in small business. They, along with a PricewaterhouseCoopers research team, brought to the project extensive experience with both small public companies and SOX 404 from within their respective organizations. The team focused on providing examples that clearly demonstrated how the principle-based Framework can be applied to businesses of all sizes. According to Everson, ?The guidance does not change the requirements for effective internal control over financial reporting, but it does more clearly articulate how smaller businesses can achieve effective internal control in a more cost-efficient and practical manner.? ?While the control principles addressed in the new document may be applicable to both large and small companies,? says Rittenberg, ?it was important for us to demonstrate how smaller public companies can implement effective internal control in a different manner than do their larger counterparts. For example, management?s hands-on approach in smaller businesses may create opportunities for controls to be less formal without decreasing their quality. Further, the scale of those controls may differ and the opportunity to shift many of the controls from a fixed cost to a variable cost structure may be available to smaller companies.? The guidance asserts that internal control over financial reporting may be accomplished by choosing approaches to applying the COSO principles that best fit each company?s circumstances in the most effective and efficient manner. According to the guidance, smaller businesses may strengthen internal controls by broadening the pool of audit committee members, using software templates for design and evaluation, leveraging management monitoring, and outsourcing some activities. This new guidance provides a tool for management to use in determining the appropriate level of internal controls over financial reporting for smaller businesses. ?This new project puts into practice the theory behind COSO?s prophetic 1992 guidance,? says The Institute of Internal Auditors President David A. Richards, CIA. ?Not only will it help smaller companies use the Framework, but also it will clarify for all organizations, regardless of size, the true and steadfast value and applicability of the Framework?s principles. This is not just about small business. It?s about good business,? says Richards. The document is intended for use by board members, senior management, other personnel and external auditors. Because of similar initiatives at the SEC and PCAOB, those organizations each provided an observer to the project. The report can be accessed at www.coso.org. COSO encourages interested parties to read and comment on the exposure draft and to direct comments through the website at www.ic.coso.org. The comment period ends December 31, 2005. Final guidance is expected in the first quarter of 2006. Originally formed in 1985 to sponsor the National Commission on Fraudulent Financial Reporting, COSO is a voluntary private sector organization dedicated to improving the quality of financial reporting through business ethics, effective internal controls, and corporate governance. COSO comprises The Institute of Internal Auditors (IIA), the American Accounting Association (AAA), the American Institute of Certified Public Accountants (AICPA), Financial Executives International (FEI), and the Institute of Management Accountants (IMA). 
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