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The Magic Words: Internal Control Structure and Procedures In 1985, inspired by an alarming increase in fraudulent corporate financial reporting, a consortium of the largest accounting professional associations formed the National Commission on Fraudulent Financial Reporting, more commonly referred to as The Treadway Commission. Each member of the consortium also participates in a supporting organization, COSO ” literally, the Counsel of Supporting Organizations. COSO works on ethical and professional issues for the accounting profession. Periodically, it comes out with a report. These reports and their recommendations have a powerful self-governing influence on accountants.

A New Frontier: Process Compliance Sarbanes-Oxley is perhaps the most profound revision of securities laws since the 1934 Act that created the SEC in the first place. 404 of the Act in particular provides a subtle but extremely significant expansion in the SECs regulatory authority. Before 404, the main reporting duty revolved around financial results. The regulatory mandate was fairly clear: report your results from operations accurately. Now, the SECs scope also reaches into the processes of obtaining those results, and the mandate is not so clear. A number of related questions arise: what was your process that generated the numbers? Tell me all about it: Was the process reliable? Did it accord to an acceptable framework of enterprise risk management (ERM)? Were there appropriate internal controls in position to flag and curtail financial gimmickry (intentional and unintentional)? How well does your internal control system work, and how does it compare to how it worked before? This change provides an entirely new risk frontier for noncompliance: not only must the ultimate numbers and risks be honestly reported, but the process that generated them must meet a legal standard of propriety.