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COSO ISSUES UPDATED INTERNAL CONTROL-INTEGRATED FRAMEWORK

Background Section 404 of the Sarbanes-Oxley Act of 2002 (SOX) mandates that all publiclyregistered companies must include with their audited annual financial statements a management report on the effectiveness of internal controls. Further, if a company is not a smaller reporting company it also must have its auditors provide an opinion on internal controls. When reporting on the effectiveness of internal controls, a public company must disclose the framework on which it assesses that effectiveness. Most companies use the framework promulgated by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Updated COSO Framework On May 14, 2013, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) published an update to its 1992 Internal ControlIntegrated Framework (original framework) and related illustrative documents. The goals of the update include: Clarification of the requirements of effective internal control; Update of the context for applying internal control to many changes in business and operating environments; and Broadening its application by expanding the operations and reporting objectives

Beginning with year-ends after December 15, 2014, the updated framework must be used. In this connection, COSO recommends that all organizations currently using the original framework should begin to align existing practices and related documentation to the updated framework as soon as feasible. In the meantime, the original framework can continue to be used during the transition, but the company must clearly disclose whether it utilized the original framework or the updated framework in its report on internal control. The updated framework formalizes the fundamental concepts introduced in the original framework into 17 principles associated with the five components of internal control:

Control Environment 1) The organization demonstrates a commitment to integrity and ethical values. 2) The board of directors demonstrates independence from management and exercises oversight of the development and performance of internal control. 3) Management establishes, with board oversight, structures, reporting lines, and appropriate authorities and responsibilities in the pursuit of objectives. 4) The organization demonstrates a commitment to attract, develop, and retain competent individuals in alignment with objectives. 5) The organization holds individuals accountable for their internal control responsibilities in pursuit of objectives. Risk Assessment 6) The organization specifies objectives with sufficient clarity to enable the identification and assessment of risks relating to objectives. 7) The organization identifies risks to the achievement of its objectives across the entity and analyzes risks as a basis for determining how the risks should be managed. 8) The organization considers the potential for fraud in assessing risks to the achievement of objectives. 9) The organization identifies and assesses changes that could significantly impact the system of internal control. Control Activities 10) The organization selects and develops control activities that contribute to the mitigation of risks to the achievement of objectives to acceptable levels. 11) The organization selects and develops general control activities over technology to support the achievement of objectives. 12) The organization deploys control activities through policies that establish what is expected and procedures that put policies into action. Information and Communication 13) The organization obtains or generates and uses relevant, quality information to support the functioning of internal control. 14) The organization internally communicates information, including objectives and responsibilities for internal control, necessary to support the functioning of internal control. 15) The organization communicates with external parties regarding matters affecting the functioning of internal control.

Monitoring Activities 16) The organization selects, develops, and performs ongoing and/or separate evaluations to ascertain whether the components of internal control are present and functioning. 17) The organization evaluates and communicates internal control deficiencies in a timely manner to those parties responsible for taking corrective action, including senior management and the board of directors, as appropriate. For public companies that currently apply the original framework for compliance with Section 404 (a) or (b) of SOX, COSO has indicated that the updated framework is not expected to fundamentally change an entitys internal control over financial reporting or related assessment process. COSO recommends that senior management discuss with the board of directors its plan to adopt the updated framework as soon as practical. The board of directors should oversee managements assessment of any implications of applying the updated framework as well as its determination of appropriate actions. The original framework will be considered to be superseded as of December 15, 2014. Further information is available on the COSO website at www.coso.org. A complimentary Executive Summary can be downloaded here. Please feel free to contact your PKF OConnor Davies team if you have any questions or concerns.
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