Internal Control Guidance for Smaller Public Companies

Written by: Neshelle Bailey

On July 11, 2006, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) released its latest guidance, titled Internal Control over Financial Reporting – Guidance for Smaller Public Companies (Executive Summary). This guidance is intended to provide information for small companies to become more knowledgeable about internal controls, ultimately leading to more effective control systems and greater proficiency in reporting on internal controls for regulatory compliance purposes.

Since the passage of the U.S. Sarbanes-Oxley Act of 2002 (SOX), companies, both large and small, have relied on COSO’s 1992 Internal Control – Integrated Framework as the standard for implementing and evaluating internal controls. In response to the struggle faced by small businesses to efficiently and cost-effectively apply COSO’s principles, COSO has released its newest guidance as a supplement to the Framework.

According to COSO Chairman Larry E. Rittenberg, Ph.D., CIA, CPA, “This small business guidance takes the concepts of 1992 Internal Control – Integrated Framework and demonstrates their applicability for achieving financial reporting objectives of smaller publicly traded companies.” Rittenberg goes on to say that the “primary goal is that these smaller businesses will use the guidance as a springboard for designing and implementing processes that will help them better run their businesses, as well as to evaluate the effectiveness of their internal controls for regulatory purposes.”

Approximately 5,000 SEC registrants have annual sales of less than $200 million. In this latest guidance, COSO uses the term “smaller” rather than “small” suggesting that the size of a company is determined by a wide range of characteristics. COSO offers a list of characteristics that many smaller companies have:

• Fewer lines of business and fewer products within lines
• Concentration of marketing focus, by channel or geography
• Leadership by management with significant ownership interest or rights
• Fewer levels of management, with wider spans of control
• Less complex transaction processing systems and protocols
• Fewer personnel, many having a wider range of duties
• Limited ability to maintain deep resources in line as well as support staff positions such as legal, human resources, accounting and internal auditing.

Undoubtedly, COSO’s newest guidance, Internal Control over Financial Reporting – Guidance for Smaller Public Companies, will provide the same high standard for internal control guidelines that its previous guidance has provided to all companies, regardless of size.

Contact Nichols, Cauley & Associates by Email, phone, or online form with your questions.

Site visitors should keep in mind that the content is generally designed to be of general applicability. Particular state laws, regulations and special contractual provisions can greatly impact rights, responsibilities and legal obligations. Only a competent attorney, accountant or other professional looking at all the pertinent facts and circumstances of a particular situation can provide definitive guidance for you. Please refer to our important legal discalimer which can be accessed from the bottom of any BankAudit.net webpage.