Internal Controls — A Review of Current Developments

August 2006 from International Federation of Accountants – This review summarizes key internal control frameworks, highlights recent legislation, and discusses the role of internal control in enhancing corporate governance. It is a 19 page document and we will just quote some of the more interesting paragraphs “… As the severity of high-profile corporate accounting failures has increased steadily over the last decade, there has been a corresponding increase in the development of new legislation, standards, codes and guidelines to assist organizations in improving their corporate governance. While these standards and guidelines originated from a variety of sources, they share a core principle: that good governance, by its nature, demands effective systems of internal control.

Recognition of the critical importance of internal control is evident in the key frameworks and guidelines on the subject. In the 1990s internal control frameworks such as the COSO1 (USA), Turnbull2 (UK) and CoCo3 (Canada) emerged, some of which have recently been reviewed and updated or supplemented. In addition, there are many other publications on the theory and benefits of internal control…

As internal control frameworks, COSO, Turnbull and CoCo complement each other. They each see internal control as a process/set of processes designed to facilitate and support the achievement of business objectives. Each of the frameworks takes the wider approach to internal control covering consideration of significant risks in operations, compliance and financial reporting. Objectives such as improving business effectiveness are included, as are compliance and reporting objectives. The narrow approach to internal control is usually restricted to internal control over financial reporting…

SOX focuses on one specific aspect of internal control, that related to internal control over financial reporting whereas, as been previously noted, the key internal control frameworks such as COSO, Turnbull and CoCo take a wider business-led approach and cover all controls. Assessments of internal control using the SOX definition are less likely to focus on the business benefits that can result from a review of the wider aspects of internal control and the related processes for risk management…

By covering all material controls and linking internal control to risk management, it allowed companies to focus on the most significant risks facing them. By setting out high-level principles rather than detailed processes, it required boards to think broadly about their company’s risks and enabled them to apply the guidance in a way that suited the circumstances of their company.”

180 View – We believe that internal control should consider business effectiveness. In this way, the control review will provide more value. As well, there should not be a significant increase in time spent as long as the reviewer has the expertise in compliance as well as efficiency and effectiveness.