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.
“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.