Thursday, August 24, 2006

International Accountants Reject SOX Internal Control Model

I have been commenting on the emergence of an international consensus that has steadily and inexorably been building towards a principles-based, risk-focused approach to internal controls and away from the prescriptive approach embodied in Sec. 404 of the Sarbanes-Oxley Act. Now a seminal report by the International Federation of Accountants adds fuel to this fire. The report reveals broad support for a principles-based, non-prescriptive approach that recognizes the need for companies to develop an internal control system particular to their own specific internal and external environments.

Many jurisdictions are coming to the view that Sec. 404 and related guidance for auditors is the product of a unique rules-based US regulatory framework characterized by detailed and costly compliance mandates. Other jurisdictions, including the UK and Hong Kong, have recently endorsed principles-based and market-led internal control frameworks.

The IFAC report revealed that the preference of the corporate and auditing communities is for an internal control system that sits within a risk management
framework and is embedded within the company, with employees informed as to how it impacts on their roles and their requirements in terms of monitoring and reporting. Moreover, the importance of the tone at the top and the ethical framework throughout the company is considered essential to the successful implementation of an internal control system.