Understanding Internal Control Frameworks and Regulations

Chapter 7: Internal Control Frameworks Foreign Corrupt Practices Act (FCPA) First piece of regulation that required US companies to maintain good systems of internal control. 1970's. Did not requireauditsof controls Sarbanes-Oxley (SOX) New rules for management of publicly traded companies oManagement is responsible for establishing and maintaining an adequate internal control system over financial reporting. Other operational controls also a good idea too, but if they do not affect the financial statements, they are not relevant to SOX compliance. oThe auditors are told about all material internal control weaknesses and fraud (even if fraud is immaterial). Created new external auditing rules oAudit partners must rotate periodically oProhibited from performing certain non-audit services New rules for Audit Committees oStill part of Board of Directors with new independence rules oOne member must be a financial expert oOversees external auditors (usually internal audit as well, although this is not a SOX rqmt) Created Public Company Accounting Oversight Board (PCAOB) oEntity that oversees the external auditing profession, including: Process, review, and approve the registration of public accounting firms that audit publicly- traded companies Inspect and review selected audit engagements of registered public accounting firms. Establish auditing, quality control, and independence standards for audits of issuers. oWho gives the PCAOB power and how is it funded? Corporate management structure See visual on next page. oRectangles with two lined-border represent the board of directors oRectangles with one line border represent the audit functions oOvals represent employees of the company Layout of a company's corporate structure is critical to success of implementing controls (think of it like segregation of duties) oWhy is the audit committee (comprised of board members) structured so that company employees are not allowed on it?