LEAN ACCOUNTING BEST PRACTICES FOR SUSTAINABLE INTEGRATIONE phần 9 potx

Still more financial reporting fiascos in the late 1980s that culminated with

the savings and loan scandals, led to further discontent with the understanding

of what constitutes adequate systems of internal accounting control. This dis￾content led to the formation of the National Commission of Fraudulent Fi￾nancial Reporting (commonly known as the Treadway Commission after its

chairman, James C. Treadway, a lawyer and former SEC commissioner) in

1985 to recommend how the various concepts and definitions of internal con￾trol could be integrated. The result was the publication by Committee of Spon￾soring Organizations (COSO) of its internal control framework document in

1987 and a later amendment in 1992. This two-volume, several hundred-page

framework, entitled Internal Control-Integrated Framework, contains guidance

on not only the reliability of financial reporting (internal accounting control)

but on two other categories of internal control—the effectiveness and effi￾ciency of operations and compliance with applicable laws and regulations.

(a) Important Points from a Historical Perspective

The important points to keep in mind from this historical perspective are:

• The accounting profession has managed the thinking on internal control

for most of the twentieth century, and those definitions were influenced

by the questions raised concerning the extent to which auditing work was

necessary.

• The work of COSO was strongly influenced by the perspectives of the

independent accountant, even though other interested parties participated

in developing this framework.

• Recognition was growing that the internal control over financial

reporting—while remaining very prominent—is but one aspect of inter￾nal control. COSO, for example, concluded on three categories that need

to be effective: effectiveness of operations, reliability of financial report￾ing, and compliance with applicable laws and regulations.

(b) Sarbanes’s Major Provisions

Enacting Sarbanes, some argue, will become known as the perfect financial

storm,5 citing all three elements of the impending disaster: the heat from the

rising stock market that swept the nation throughout the 1990s; the cold from

the economic downturn that blew in at the end of the decade; and before the

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storm could blow out, the development of a new hurricane in the form of ac￾counting irregularities and other questionable practices of 2001 and 2002 that

tipped the scales.

Consider Tyco and the alleged pocketing of millions by the CEO, Dennis

Kozlowski, that was not rightfully his; the members of the Rigas family, who

were charged with the fraud in the Adelphia scandal; the WorldCom executives,

who were charged with accounting fraud; and the fall of Enron and the related

indictments against Ken Lay, Jeff Skilling, Andy Fastow, and others in that

massive fraud. The stage was set. Something had to be done, and it was. Con￾gress and regulators acted swiftly, and while the aftermath may linger for years

to come, its immediate effects are already being felt.

Some of those immediate effects come about by virtue of the provisions of

the law. Others, which many are finding more ominous, arise due to the ways

that the requirements are being implemented. Essentially, the government is

again attempting to prevent individuals from criminal acts by passing more

stringent legislation. This approach brings to mind Einstein’s definition of in￾sanity: doing the same thing over and over again and expecting different results.

Nonetheless, Sarbanes now requires:

• Audit committees that consist solely of independent directors and at least

one that is designated as a financial expert.

• Auditing standards that are set by the newly formed Public Company

Accounting Oversight Board (PCAOB). Auditing firms are required to

register with and be monitored by the PCAOB.

• Auditors are required to issue two additional opinions. One of those opin￾ions covers management’s process of establishing and evaluating their

controls. The second is the auditor’s opinion on the effectiveness of those

controls.

• CEOs and CFOs are required to:

• Certify that it is their responsibility to establish and maintain adequate

internal control over financial reporting.

• Identify the framework used to evaluate the effectiveness of internal

control over financial reporting.

• Conduct an assessment of the effectiveness of the company’s internal

control over financial reporting as of the year-end.

• State that its auditor has issued an attestation report on management’s

assessment.

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It is clear that COSO failed to alter the fixation on financial reporting con￾trols and the importance placed on such controls in deterring financial report￾ing fraud. Perhaps it’s true that people tend to drift to the familiar, especially

in times of crisis. The response to Sarbanes is no different. The fixation on fi￾nancial controls overrode any of the other considerations when Sarbanes was

being implemented, so the financial reporting controls took center stage, and

only those elements of COSO were considered. With the AS2 requirements,

the auditors held all the trump cards. Accordingly, driven by the need to sat￾isfy the auditor’s requirement, management fell into the trap of blind obedience.

10.3 Q2: WHERE CAN WE GO FROM HERE?

We now turn to the second question: Where do we go from here—is there any

hope that the Sarbanes control and review requirements can be incorporated

into an organization’s DNA? Yes, it can become part of the very fabric of the

way companies are managed. In April 2005 and again in May 2006, the SEC

held roundtable discussions in Washington, D.C. Both were a “who’s who” list

of panelists,6 as well as all SEC commissioners and board members of the

PCAOB. Over 60 experts participated in a number of panel discussions, and

although they were a diverse group, the themes were consistent throughout.

The message at each session was: “It is not the legislation that needs to be

fixed, but rather the implementation of 404 through the auditors, PCAOB, and

SEC that needs to be addressed.”7 The most popular topic was the need to con￾trol the substantial and unanticipated costs of Section 404 compliance.

(a) SEC and PCAOB Issue New Interpretations

Subsequent to the first roundtable held in 2005, the SEC and the PCAOB is￾sued interpretations to address the issues raised. In its statement, the SEC said:

An overarching principle of this guidance is the responsibility of management

to determine the form and level of controls appropriate for each company and to

scope their assessment and the testing accordingly. Registered public account￾ing firms should recognize that there is a zone of reasonable conduct by com￾panies that should be recognized as acceptable in the implementation of Section

404.8

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