labour-saving document
Reducing wasteful duplication and streamlining financial
reporting – those are the goals of a discussion document that has
been released for comment by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in the US.
COSO partnered a team from Grant Thornton US to produce the
document, entitled Guidance on Monitoring Internal Control Systems
(GMICS). The partnership hopes the final document will help
organisations to monitor the quality of their internal control
systems as well as to comply with the 2002 Sarbanes-Oxley Act
(SOX).
Grant Thornton US managing partner of corporate governance Trent
Gazzaway led the Grant Thornton team. He said he hopes GMICS will
effectively reduce compliance costs and burden. “The goal from the
start has been to both improve the efficiency and the effectiveness
in the evaluation of internal control,” Gazzaway explained. “I
think the COSO board recognised early on that the high cost of
complying with Sarbanes-Oxley has been due in a large part to
either a lack of application or a lack of understanding of the
monitoring component of the COSO framework.”
Compliance burden split
Gazzaway said compliance burdens can be broken down
to two common issues: the duplication of unnecessary internal
monitoring and the absence of effective internal controls. “In many
cases, effective monitoring is going on right now. Companies are
doing what they need to do to get comfortable that internal
controls are working. But rather than rely on that monitoring, they
are layering on top of that a whole other layer of evaluation in
the fourth quarter and performing in some cases inefficient
duplicative monitoring of internal controls,” he said.
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By GlobalData“In other cases, the effective monitoring is not present in certain
parts of the organisation and because it’s not present, companies
are forced to layer on top this large fourth quarter exercise to
get comfortable that internal controls are operating.”
Gazzaway told TA he hoped the benefits of the document
would be twofold. The first is that people would recognise
effective monitoring where it existed and take credit for it – not
duplicating it unnecessarily. Second, where effective monitoring
was not taking place it would be started, improving the efficiency
of not only the evaluation of internal control but the efficiency
of the whole internal control system.
Gazzaway said it is impossible to put a dollar amount or a
percentage figure on the cost that the new guidance document could
save companies across the US. But he hoped the guidance assistance
would take complying to section 404 of SOX closer to what the US
Congress originally intended when it created the act. “I think they
never intended for complying with section 404 of Sarbanes-Oxley to
drastically increase the cost of being a public company. I think
[with this document] we are going to get back to more of what
Congress had originally anticipated when they passed section 404,”
he said.
Widespread benefits
There are broader benefits than just improving the efficiency of
the Sarbanes-Oxley section 404 compliance, Gazzaway added. “I think
the concepts in this document are really useful beyond just
financial reporting. And we hope that companies will take advantage
of the guidance and areas of operations where they are monitoring
operations, where they are monitoring compliance with laws and
regulations, not just in managing or monitoring the quality of
their internal control of their financial reporting,” he
said.
COSO chairman Larry Rittenberg also hopes for a finished product
with broad applications. “We think we’re making significant
progress, and additional practitioner input beyond that of our team
will really help to ensure our final product meets the needs of
multiple stakeholders,” he said.
Gazzaway said the project is in two stages. The first phase,
including the release of the discussion document, laid out the
concepts of what is effective monitoring. The second phase,
currently under way, involves the development of case studies,
tools and general guidance examples of how to apply the contents of
the document.
He said the team will amend the document at the end of October,
incorporating discussion comments, add in the phase two material
and issue a public exposure draft around the end of this year. The
intention is to produce a final document in the first quarter of
2008.
The comment period for the discussion paper ends 31 October
2007.
