SEC to Require Stricter Internal Controls
The new requirements would apply to public companies under the jurisdiction of the Securities and Exchange Commission and is widely applauded by industry groups, including the American Institute of Certified Public Accountants.
The SEC voted to adopt rules concerning management's report on internal control over financial reporting and certification of disclosures in Exchange Act periodic reports. The Commission also voted to adopt new Rule 3a-8 under the Investment Company Act to provide a nonexclusive safe harbor from the definition of investment company for certain research and development companies.
Last year’s Sarbanes Oxley Act required the SEC to get control of the lax financial standards in place in many companies, which regulators said led to corporate scandals in companies such as Rite Aid Corp. and WorldCom, Inc.
"Internal controls can be a significant deterrent to management fraud," said Douglas R. Carmichael, chief auditor of the new Public Company Accounting Oversight Board. "They're not a foolproof solution, but they have a lot of potential for improving the situation."
The SEC issued  a press release stating that under the final rules, management's annual internal control report will have to contain:
- a statement of management's responsibility for establishing and maintaining adequate internal control over financial reporting for the company;
- a statement identifying the framework used by management to evaluate the effectiveness of this internal control;
- management's assessment of the effectiveness of this internal control as of the end of the company's most recent fiscal year; and
- a statement that its auditor has issued an attestation report on management's assessment.
The SEC further defined "internal controls over financial reporting" and adopted amendments requiring companies to perform quarterly evaluations of changes that have materially affected or are reasonably likely to materially affect the company's internal control over financial reporting.